State Ownership Makes Stronger the Relationship between Market Power and Income Diversity – A Case of Vietnamese Commercial Banks

The Project on Restructuring the Credit Institution System in the first period from 2011 to 2015 and
the second period from 2016 to 2020 has emphasized the important role of reducing the relying on
traditional activities and increasing the share of income from non-credit services. The level of noninterest
income, per contra, varies from state-owned banks to privately-own bank. The paper,
therefore, was conducted to examine the relationship between market power and income diversity
under the moderating of state ownership by using a sample of 26 Vietnamese commercial banks,
listed in Ho Chi Minh Stock Exchange (HOSE), Ha Noi Stock Exchange (HNX), UPCoM and OTC,
during 2007 to 2017. The market power was proxied by both the conventional Lerner index and the
efficiency-adjusted Lerner index; the quotient of net non-interest income to total operating income
represented the income diversity; and state ownership was treated as a dummy variable and a
moderator. Additionally, bank characteristics and country characteristics were considered to be
control and dummy variables in the research models. Based on panel data analysis with GMM
estimators, the results pointed out that the banks with greater market power can generate more noninterest
income. This relationship, moreover, was greatly impacted by state ownership. Specifically,
this paper also highlighted that state ownership makes stronger on the association between bank
market power and its income diversity. The findings are expected to add the gap in the existing
literature, lacking of investigating the impacts of market power on bank income diversity, and the
moderating role of state ownership in this relation in Vietnamese banking sector, which is ignored or
opposite in most recent studies. Thereby, the paper also gives some useful implications for investors,
bank managers as well as policy makers to catch up the market fluctuations.