Impact of the COVID-19 pandemic on bank efficiency in Vietnam

Banking system is an important part of the financial system of each country. The operating efficiency in the commercial banking system will provide the tools and financial products more attractive and relevant to the needs of actors in the economy. The purpose of this paper is to analyze the impact of COVID-19 on the efficiency of 26 Vietnamese commercial banks. The paper uses a quantitative method with the nonparametric frontier analysis, data envelopment analysis (DEA) approach, to measure the efficiency of Vietnamese commercial banks. The paper adopts an intermediation approach as the banks are viewed as financial intermediaries providing financial services and payment services to entities in the economy. Research findings reveal that Vietnamese commercial banks have effectively leveraged the positive impacts of the COVID-19 pandemic, since the average efficiency in 2020 improved over the pre-pandemic period in 2019 on the same models for comparison and estimation. Based on such findings, the study makes some suggestions and recommendations to help Vietnamese commercial banks increase their operational efficiency in the context of the prolonged pandemic.
AcknowledgmentThe author wishes to acknowledge support from the Banking University – Ho Chi Minh City. This research was made possible thanks to all valuable support from relevant stakeholders.


INTRODUCTION
Research on operational efficiency first originates from manufacturing enterprises to make appropriate recommendations and strategies for optimizing the available resources of production units. However, in recent years, the studies on efficiency have been applied by financial institutions, especially banks, to inform management decisions for improving the banks' efficiency. The most commonly used research methodology today on analyzing the efficiency of banks is a frontier technique, including parametric and non-parametric analysis ( In Vietnam, commercial banks hold an important position in the process of helping the economy's capital circulate, contributing to economic growth. When commercial banks operate effectively, they will help: 1) to speed up the capital turnover process of the economy at a lower cost; 2) to increase the savings and investment rate of the economy; 3) to improve the efficiency of capital use by actors in the economy; and 4) to minimize information asymmetry in the financial market, thereby contributing to promoting economic growth of the country.
Therefore, this study focuses on analyzing the impact of the COVID-19 pandemic on the performance of commercial banks to provide more empirical evidence in a country with a developing economy like Vietnam.

LITERATURE REVIEW
The concept of efficiency was first introduced by Koopmans (1951), whereby a production unit is deemed efficient if the output is maximum with a given input. According to Coelli et al. (2005), an economic entity is deemed more efficient than another if it can provide more goods and services to the society without consuming more resources. In other words, enterprises are most efficient when they can maximize potential output by optimizing the given input. Technical efficiency means the ability to use the least input to produce a given unit of output or to obtain the maximum output from a given unit of input. Production units' efficiency goals also mean waste minimization.
Berger and Mester (1997) consider operational efficiency of production units as the relationship between revenues from outputs and the costs of using inputs or the ability to turn inputs into the best outputs in the course of operation. Berger and Mester (1997) views banks' efficiency as the largest output revenues that can be generated by banks given the smallest value of inputs. A bank is said to be cost-effective or reaching overall economic efficiency when it achieves both allocative and technical efficiency (Banker et al., 1984).
Within the scope of this study, banks' efficiency is considered as whether the banks use inputs and maximize potential output or whether the banks can minimize the use of inputs to achieve pre-determined output targets. Banks achieve operational efficiency when they can generate the largest output revenues by using the same amount of inputs as other banks but with the lowest costs Modern methods of measuring efficiency began with the studies by Farrell (1957), which are based on the studies by Debreu (1951) and Koopmans (1951), to provide a basic definition of the efficiency of a company or production unit with multiple inputs and outputs. Economic efficiency is considered as the degree of success that production units or banks achieve in allocating inputs to optimize outputs. Coelli  deposits, higher income diversification, and lower non-performing loans.
Demirguc-Kunt et al. (2021) analyze the impact of the COVID-19 pandemic on the share price of the banking sector through the control measures of governments as well as central banks. The research results show that in countries with expansionary monetary policy through liquidity support policies for banks, interest rate support policies for borrowers, the share price of the banking industry tends to increase. In contrast, in countries with prudent monetary policy, the share price of the banking sector tends to decline.
Hu and Zhang (2021) analyze the impact of the COVID-19 pandemic on the performance of companies around the world. The analysis results show that the performance of companies on a global scale tends to decline due to negative impacts from the COVID-19 pandemic. However, in countries with better universal health care systems, the performance of companies is also better. Li et al. (2021) analyze the impact of the COVID-19 pandemic on bank profitability and risk through income diversification. The results show that when the COVID-19 pandemic strongly affects traditional credit activities, banks with a high percentage of income from credit activities will be negatively affected by the COVID-19 pandemic. In contrast, banks with good income diversification and high service revenues have increased profits by taking advantage of the positive aspects of the COVID-19 pandemic.
Through a review of related previous studies, the research hypotheses of this paper are set. The COVID-19 pandemic has a negative impact on the efficiency of commercial banks in Vietnam. Due to the impact of the COVID pandemic, the bad debt of commercial banks will increase, thereby reducing the operational efficiency of commercial banks. The hypothesis of the study is built on the basis of the research by H3: SE of Vietnamese commercial banks are negatively impacted by the COVID-19 pandemic.

METHODS AND DATA
Data Envelopment Analysis (DEA) method was developed by Charnes et al. (1978) when evaluating the efficiency of the public sector with various inputs and outputs. The model of Charnes et al. (1978) is used to measure the overall technical efficiency of a production unit. The outstanding advantage of DEA is that when estimating the efficiency of banks, it is not necessary to choose a suitable form of production function. Besides, the DEA method can also: 1) be applicable to banks with various inputs and outputs; 2) measure inefficiencies in each input and output for banks; 3) build the efficiency frontier based on the actual sample, so the DEA analysis gives more accurate efficiency measurement results (Avkiran, 1999;Sathye, 2001).
Bank efficiency in this study is measured using a technical efficiency index by non-parametric DEA approach via DEAP 2.1 software (Coelli et al., 2005). According to Coelli et al. (2005), an economic entity is deemed more efficient than another if it can provide more goods and services to the society without consuming more resources. In other words, enterprises are most efficient when they can maximize potential output by optimizing the given input. Technical efficiency means the ability to use the least input to produce a given unit of output or to obtain the maximum output from a given unit of input.
Dataset is taken from the audited financial statements of 26 Vietnamese commercial banks in the period of 2019-2020. Table 1 shows the information of these banks, including detailed bank code, bank name, city of a headquarter, charter capital and banking websites. In this study, banks are viewed as financial intermediaries that provide financial services and payment services to entities in the economy ( And the bank output variables include: 1) total loans, 2) interest income, and 3) non-interest income (including net income from services, net income from trading activities of securities trading, investment and net income from other activities).
In the first step, financial statements of 26 commercial banks were collected from their websites. These data are listed alphabetically and classified by bank code. Four input variables and three output variables were obtained from these 26 banks financial statements and collated to prepare for the second step.

RESULTS
On January 23, 2020, the first case of COVID-19 was announced in Vietnam. Therefore, the study uses data collected during the period 2019-2020  Statistical results of input and output variables of 26 commercial banks in 2020 are presented in Table 3. BID maintains the largest input and output variables in 2020. While VAB has the lowest personnel expenses in 2020, SGB has all 6 items: 1) total customer deposits; 2) non-interest expense; 3) interest expense; 4) total loans; 5) interest income; and 6) non-interest income, ranked at the bottom.
To analyze the impact of the COVID-19 pandemic on the efficiency of commercial banks in Vietnam, the banks in 2019 and 2020 are treated as independent DMUs. Therefore, the dataset to calculate the efficiency of 26 Vietnamese commercial banks includes 52 DMUs, and the observation period is 1.
The main purpose of combining 2019 and 2020 into one observation period is to compare the COVID-19 impacts on the banks' efficiency in the period immediately before (2019) and during (2020) the pandemic. The aggregation of the observation periods also helps the banks themselves compare their own efficiency before and during the pandemic.
The statistical results on technical efficiency presented in Table 4 show that the technical efficiency under the constant returns to scale (CRS) assumption of 26 commercial banks in 2019 reaches the   Table 6 shows an efficiency comparison of each bank before and during the COVID-19 pandemic. During the COVID-19 pandemic, the operational efficiency of 26 commercial banks in Vietnam tends to outdo the pre-pandemic peri-

DISCUSSION
Efficiency analysis of 26 Vietnamese commercial banks with DEAP 2.1 shows that the average operational efficiency of Vietnamese commercial banks increased during the COVID-19 pandemic. The operational efficiency in 2020 during the COVID-19 pandemic is higher than before the pandemic across all three efficiency indicators TE CRS , TE VRS and SE. Currently, there are not many studies in the world comparing the efficiency of commercial banks before and during the COVID-19 pandemic, so the research lacks a benchmark. However, according to previous studies on crisis periods, the efficiency of commercial banks will decrease due to governance capacity and suboptimal combination of inputs and outputs. A study by Ferreira (2020) with a dataset of 485 banks from all EU member states between 2011 and 2017 shows that the efficiency of commercial banks declined due to the impact of the financial crisis. Research Impact analysis of the COVID-19 pandemic on the efficiency of Vietnamese commercial banks shows that by the end of 2020, Vietnamese commercial banks have effectively leveraged the positive aspects and mitigated the negative aspects of the pandemic on banking operations. To help Vietnamese commercial banks increase opera-tional efficiency in the context of the prolonged pandemic, the study proposes a number of recommendations, which are presented below.
First, commercial banks need to develop and diversify banking products and services with high added values to increase fee incomes rather than from conventional credit operations. Besides, this can also help Vietnamese commercial banks to allocate risks and avoid concentration risk due to dependence on conventional credit operations.
Second, Vietnamese commercial banks need to improve the quality of banking business administration to make the most of the available inputs such as reducing interest expenses, personnel expenses or downsizing, reducing other expenses such as administrative costs and advertising costs to improve the efficiency of banks' resources.
Third, to promote the application of new technologies, it is necessary to shift from breadth to depth of developments and applications. Vietnamese commercial banks need to develop technology development policies and make rational investments because modern technology is the key to help banks reduce costs and improve the efficiency of inputs.
Fourth, banks can also improve the quality of human resources by planning training and professional development, thereby having a team of qualified and professional banking staff to serve development requirements. It is high-quality human resources that drive Vietnamese commercial banks towards a sound roadmap to effectively utilize available resources, thereby increasing operational efficiency.
Finally, Vietnamese commercial banks need to improve their financial capacity by increasing charter capital, ensuring the minimum capital adequacy ratio in accordance with international standards and regulations of the State Bank of Vietnam and the standards of Basel III Accord. Accordingly, commercial banks need to determine an appropriate percentage of annual retained earnings to increase charter capital or conduct M&A of small banks to improve financial capacity or call for contributions from shareholders to adequately reserve for potential future shocks.

CONCLUSION
Estimating the operational efficiency of commercial banks before and during the COVID-19 pandemic helps commercial banks and regulators come up with solutions to improve performance of commercial banks in the context of the prolonged COVID-19 pandemic in Vietnam. By analyzing the efficiency of 26 Vietnamese commercial banks in the period of 2019-2020 with an intermediary approach, it has been confirmed that: 1) the operational efficiency of Vietnamese commercial banks during the COVID-19 pandemic period has improved compared to the pre-pandemic period; 2) the operational efficiency of Vietnamese commercial banks is improved thanks to the improvement of TE CRS , TE VRS and SE through measures to improve governance efficiency and reduce operating costs through technology application.
Although some encouraging results have been achieved, given time constraints and methodology shortcomings, the study still has certain limitations. First, the study obtains data from the financial statements of commercial banks, so the figures in the financial statements are heavily affected by current regulations applicable during the COVID-19 pandemic and may not accurately reflect the actual operational efficiency of Vietnamese commercial banks. Second, the study only adopts the DEA method to measure the efficiency of 26 Vietnamese commercial banks in the period of 2019-2020. Further studies can expand the coverage of field surveys to assess the current performance of the banks and combine parametric analysis method to estimate the efficiency of the selected banks more exactly.
Based on the research results, the paper makes recommendations to the regulatory agencies and the State Bank of Vietnam to have solutions to support the commercial banking system. The State Bank of Vietnam has also issued support policies for commercial banks in distress due to the COVID-19 pandemic to help them increase their accounting profit and improve operational efficiency.

ACKNOWLEDGMENT
The author wishes to acknowledge support from the Banking University -Ho Chi Minh City. This research was made possible thanks to all valuable support from relevant stakeholders.