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The cost efficiency of Vietnamese Cost efficiency

of Vietnamese
banks – the difference between banks

DEA and SFA

Phong Hoang Nguyen and Duyen Thi Bich Pham 209
Quy Nhon University, Quy Nhon, Vietnam
Received 18 December 2019
Revised 4 February 2020
Abstract Accepted 9 March 2020
Purpose – The paper aims to enrich previous findings for an emerging banking industry such as Vietnam,
reporting the difference between the parametric and nonparametric methods when measuring cost efficiency.
The purpose of the study is to assess the consistency in issuing policies to improve the cost efficiency of
Vietnamese commercial banks.
Design/methodology/approach – The cost efficiency of banks is assessed through the data envelopment
analysis (DEA) and the stochastic frontier analysis (SFA). Next, five tests are conducted in succession to
analyze the differences in cost efficiency measured by these two methods, including the distribution, the
rankings, the identification of the best and worst banks, the time consistency and the determinants of efficiency
frontier. The data are collected from the annual financial statements of Vietnamese banks during 2005–2017.
Findings – The results show that the cost efficiency obtained under the SFA models is more consistent than
under the DEA models. However, the DEA-based efficiency scores are more similar in ranking order and
stability over time. The inconsistency in efficiency characteristics under two different methods reminds policy
makers and bank administrators to compare and select the appropriate efficiency frontier measure for each
stage and specific economic conditions.
Originality/value – This paper shows the need to control for heterogeneity over banking groups and time as
well as for random noise and outliers when measuring the cost efficiency.
Keywords Cost efficiency, Data envelopment analysis, Stochastic frontier analysis, Emerging banking
Paper type Research paper

1. Introduction
The efficiency of the banking industry has always been of particular concern to policymakers
and researchers all over the world as banks play an extremely important role in the
development prospects of each nation. That interest has been intensified over the last
two decades, especially since the global financial crisis. When assessing the development
prospects of banks, both researchers and managers rely on economic theories to measure and
compare efficiency across banks. Efficiency measurement is an important reference for
policymakers and market participants; however, Bauer et al. (1998, p. 88) show their concern
when the efficiency scores of the banks are significantly different in most studies. Based on
this, using the same set of data, the research is conducted to measure the efficiency of
Vietnamese commercial banks in two different methods including the stochastic frontier
analysis (SFA) and the data envelopment analysis (DEA). These are the two most commonly
used efficient frontier measures in bank efficiency studies. The results of the two methods will
then be analyzed and compared to make the most appropriate comments.
The Vietnamese banking industry provides an interesting background to evaluate cost
efficiency of banks. The fledgling banking industry of Vietnam has continuously experienced

© Phong Hoang Nguyen and Duyen Thi Bich Pham. Published in Journal of Economics and
Journal of Economics and
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p-ISSN: 1859-0020
creativecommons.org/licences/by/4.0/legalcode DOI 10.1108/JED-12-2019-0075
JED important reforms. In particular, since joining the WTO, Vietnamese commercial banks have
22,2 stepped up their restructuring, merger and acquisition (M&A) plans under a proposal
proposed by the government. This program aims to improve the transparency, efficiency and
competitiveness of the banking system. Therefore, an analysis of the change in the efficiency
of banks is necessary to determine the success of the proposal. The effectiveness of
restructuring policies in Vietnam will be an important reference basis for similar emerging
banking industries.
210 The key issue leading to this study is the empirical performance of the efficiency frontier
measures. The paper compares the results to find out whether there are significant
differences in the DEA and SFA models across various samples. The main objective of this
study is not to determine which approach is best for efficiency analysis, but it is important to
find out the conflicting information provided by these two methods. Charnes et al. (1978)
considered this approach a cross-checking method for consistency of efficiency measures.
Through two different techniques, parametric and nonparametric, consistent results will be
an important basis for policymakers and bank managers to be more confident in making
decisions.

2. Literature review
DEA uses a linear programming technique to measure the relative efficiency of a set of similar
decision-making units (DMUs), such as a set of same sector banks. DEA uses multiple inputs
and outputs at the same time to determine efficiency scores which is used to evaluate DMUs.
Through the linear programming, DEA compares each DMU with the others which have the
same inputs and outputs. DEA defines an efficiency frontier as a linear set of the most
efficient units. Therefore, DMUs being not on the frontier is ineffective. The DEA evaluates
the relative efficiency of each DMU based on its distances to the efficient frontier. The farther
away the DMUs are, the less effective they are.
Based on the concept of efficiency proposed by Farrell (1957), the DEA method had been
first used by Charnes et al. (1978) which was studied under an input-oriented efficiency
approach and the assumption of constant returns to scale (CRS). Later, Banker et al. (1984)
proposed a variable returns to scale (VRS) model. These are two major DEA models that have
been used extensively in many studies. Recent studies support the use of the DEA model with
the VRS assumption because the former assumes that the CRS model is unrealistic and
appropriate only when all banks operate on an optimal scale (McAllister and McManus, 1993;
Mitchell and Onvural, 1996; Wheelock and Wilson, 1999; Sufian and Majid, 2008).
SFA is a very popular method for estimating the efficiency proposed by Aigner et al.
(1977); Battese and Corra (1977) and Meeusen and van den Broeck (1977). This approach is
developed from the idea that there are a number of factors that make DMUs not on the
effective frontier and not entirely controlled by these DMUs. SFA allows the production
functions to take into account the existence of errors when constructing the effective frontier.
These errors are disentangled into random noise and inefficiency. The former represents the
factors that affect the dependent variable but not observable, following a symmetric normal
distribution. The latter represents inefficiency and often follows a truncated normal
distribution (Berger and Humphrey, 1997, p. 15). The efficiency frontier of banks can be
measured from the frontier cost or profit function estimations; however, this study uses only
the cost function because of its popularity in the banking sector (Fries and Taci, 2005; Zhao
et al., 2010; Mihai and Cristi, 2015).
Although the number of studies comparing the results between DEA and SFA is not
much, these studies are still inconsistent. For example, the average efficiency scores
measured by DEA and SFA are well-matched in Wadud and White (2000); Weill (2004) but
not in Fiorentino et al. (2006); Delis et al. (2009) and Dong et al. (2014). On the other hand,
Silva et al. (2017) assert that DEA and SFA provide similar conclusions about industry-level Cost efficiency
efficiency, but there is a distinction when efficiency is considered in each bank. of Vietnamese
According to Bauer et al. (1998, p. 86), no method is the best for measuring efficiency. Thus,
this study will analyze the consistency or antagonism from the results of two different cost-
banks
efficient frontier measures. The author performs a robust test of estimates from DEA and
SFA based on distribution characteristics (mean, median, SD, minimum, maximum,
skewness and kurtosis) efficiency rankings, time consistency, the identification of best or
worst bank, the consistent correlations with traditionally used financial indicators and the 211
determinants of efficiency scores by the time.
In Vietnam, a number of studies taken to compare efficiency among banks mainly use the
nonparametric method – DEA (Ngo, 2010; Stewart et al., 2015). Recently, Nguyen et al. (2016)
discovered similarities of the two methods when measuring the cost efficiency of Vietnamese
banks according to each type of ownership and listing status. Wang et al. (2019) using loans
as an output also had similar conclusions about the strong consistency of DEA and SFA in
terms of cost efficiency. However, these studies only consider bank characteristics such as
inputs or outputs when measuring the efficiency without taking into account the impact of
macro factors. This study is conducted to fill that gap. In addition, the consistency over time
of banks’ cost efficiency measured by the two methods is further considered.

3. Methodology
3.1 The data envelopment analysis (DEA)
Cost efficiency refers to how a bank seeks to reduce input costs to the lowest level to create a
certain amount of output. In other words, banks that adjust production technology must take
into account the price of inputs in order to cut costs. Therefore, cost efficiency is calculated
based on the combination of input-oriented technical efficiency and input–cost allocative
efficiency. The cost efficiency model assuming VRS has form as follows:

Ei ¼ Minλ;xm wi x*i (1)

subject to the following:

X
K
λj xkj ≤ x*i ; j ¼ 1; N (2)
k¼1

X
M
λj ymj ≥ ymi ; j ¼ 1; N (3)
m¼1

X
N
λj ¼ 1 (4)
j¼1

λj ≥ 0; ∀j (5)

where k ¼ 1; . . . ; K are the number of bank; λ is a K*1 vector of constants; xi and yj are the
vectors of inputs and outputs, respectively; x*ik is the amount of input that has minimalized the
cost of the bank k at the given price wik and the certain amount of output yjk. The actual cost
JED wik x*ik of bank k will be less than or equal to the (minimum) cost frontier wik x*ik. The optimal
22,2 value of x*ik is found by solving the linear programming problem (1). The cost efficiency (CEk)
of bank k is calculated by the ratio between the minimum cost and the actual cost below:

CEi ¼ wi x*i wi xi (6)

The cost efficiency examines how close the costs of bank are at the minimum (or the cost of a
212 fully efficient bank) to produce a certain level of output at a given cost of input and
technology. Thus, the cost efficiency (CE) shows that a bank can save (1CE)*100% of the
cost. Efficiency scores are also valid from 0 to 1 (or 100%). The cost efficiency score equals to
1 if the bank is the most cost effective or has the best cost savings in the sample; otherwise
banks are cost ineffective if the efficiency score is less than 1. Banks with zero efficiency
scores are considered to be the most wasteful banks. A bank is cost effective if it is both
technically efficient and allocative efficient at the same time.

3.2 Stochastic frontier analysis (SFA)

When using the parametric method to estimate the cost efficiency of commercial banks, it is
important first to consider the appropriate cost function. Accordingly, the trans log function
is indicated because of its advantages over the Cobb–Douglas function and is most
commonly used in bank efficiency studies (Kumbhakar and Lovell, 2003; Weill, 2013). The
trans log function is highly flexible because it does not require too many constraints on
alternatives between inputs, so it allows for the determination of scale efficiency at different
output levels. In addition, the trans log function can impose parametric constraints
(homogeneous conditions) to ensure that the estimation model adheres to the theoretical
properties of the cost function. The trans log function provides the cost efficiency frontier
model of the following form:
X  
TCit 3
  X 2
Wm;it 1X 3 X 3
   
ln ¼ α0 þ αj ln Qj;it þ βm ln þ wjk ln Qj;it ln Qk;it
W3;it j¼1 m¼1
W 3;it 2 j¼1 k¼1
     
1 X X2
2
Wm;it Wn;it XX3 2
  Wm;it
þ μ mn ln ln þ τ jm ln Qj;it ln þ θ1 T
2 m¼1 n¼1 W3;it W3;it j¼1 m¼1
W3;it
X  
1 3
  X 2
Wm;it
þ θ2 T 2 þ ρj Tln Qj;it þ ωm Tln þ uit þ vit
2 j¼1 m¼1
W3;it
(7)

where TCit is the total cost (including interest expense and noninterest expense); Qj;it is the
outputs and Wm;it is the price of the inputs; α, β, w, μ, τ, θ, ρ and ω are estimated parameters;
vit is the two-sided statistical noise component assumed to follow a standard normal
distribution with a mean of zero, and uit is the inefficiency component of the composed error
term according to the truncated normal distribution. T is a time trend that captures the
impact of technological change leading to changes in production over time. T 5 1 for the year
2005, T 5 2 for 2006 . . . and T 5 13 for 2017. Eqn (7) is estimated for each bank (i 5 1,. . ., 34)
over 13 years (t 5 1,. . ., 13). Except for the T variable, all the other variables are given a
natural logarithm. The coefficients in the cost function will be estimated using the maximum
likelihood (ML) method.
The study assumes that banks have three output variables and three input prices based
on the intermediate approach which regards banks as financial intermediaries, taking
deposits and borrowing to provide loans and other assets. Accordingly, the assets may be
considered as outputs whereas liabilities can be considered as inputs. Literature review on Cost efficiency
bank efficiency using the intermediary approach as well as the availability of Vietnamese of Vietnamese
data sources determines that deposits, labor cost and physical capital will be input factors
used to generate outputs such as loans (Q1) and other earning assets (Q2) (Sealey and Lindley,
banks
1977; Berger and Mester, 1997). Therefore, input prices include the ratio of interest expenses
on total customer deposits (W1), the ratio of staff costs to total staff (W2) and the ratio of other
operating expenses to total fixed assets (W3). On the other hand, recent bank studies have
highlighted the significance of offbalance sheet items in almost all sectors of the bank, and 213
their elimination may lead to underestimation of production and inaccurate estimates of bank
performance (Casu and Girardone, 2006, p. 450). Therefore, the value of offbalance sheet items
(Q3) is also considered to be an output factor.
Estimated results from the cost frontier model will be the basis for calculating the cost
efficiency of each bank. It should be noted that the value of uit cannot be observed directly, but
only the composite error ðεit ¼ vit þ uit Þ can be observed. To solve this problem, it is possible
to use conditional distributions to inefficiencies when estimating composite errors. In the case
of truncated distribution, Battese and Coelli (1988) proposed an appropriate estimate of the
cost inefficiency associated with the exponential function expð−uit Þ for the composite errors
ðεit Þ as follows:
 
1  Φðσ *  εit γ=σ * Þ 1
CEit ¼ E½expð−uit Þjεit  ¼ : exp −εit γ þ σ * (8)
1  Φð−εit γ=σ * Þ 2

where Φ(.)
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi is the standard cumulative distribution function and
σ ¼ σ 2v þ σ 2u ; σ * ¼ σ 2v σ 2u =σ 2 ; γ ¼ σ 2u =σ 2. The value of γ must be between 0 and 1. If γ is
equal to one, the deviation from the frontier is due to the cost inefficiencyðuit Þ, while the zero
value of γ indicates that the deviation is completely explained by statistical noise ðvit Þ. The
inefficiency measured by Eqn (8) is valid for [1, ∞) and is equal to one when the bank is fully
effective. Accordingly, the cost efficiency score can be calculated as 1=CEit.

3.3 The model analyzes the determinants of cost efficiency

It is not necessary to explicitly explain the regression results to show the causal relationship
between the determinants and efficiency of the bank; However, there may still be some
important information demonstrating the consistency of the results by the two approaches in
a regression framework. There are ten different determinants of bank efficiency to be
analyzed as follows: (1) the size of the bank (LnTA) is represented by the logarithm of total
assets; (2) the loan to deposit ratio (LTD) as a measure of liquidity of banks; (3) The cost to
income ratio (CTI) represents the ability of banks to manage operating costs; (4) labor
productivity (LP) is calculated by the ratio of total income to average total number of
employees; (5) the nonperforming loan ratio (NLR) reflects the level of credit risk, an
important factor that can affect the efficiency of banks; (6) the state’s ownership structure is
represented by a dummy variable which has the value of one if the bank has over 50% owned
by the state and be equal to zero for the other banks; The two industry-specific determinants
considered in the regression model are the competition and the growth rate of banking sector.
(7) The competitive level of banks (Lerner) is represented by the Lerner index that is
calculated by the difference between the output price and the marginal cost (Berger et al.,
2009, p. 8); (8) the growth rate of the banking sector (BSD) is measured by the ratio of assets of
banking sector to GDP; finally, banking efficiency is also analyzed under the influence of
macroeconomic factors such as (9) inflation (INF) expressed by the CPI growth rate and (10)
the economic growth rate (GDP). Data on bank characteristics are collected from Orbis Bank
Focus, a database compiled by Fitch / Bureau Van Dijck that contains information about
banks around the world, while macroeconomic data are provided by the World Bank.
JED Because the DEA method produces efficiency scores as censored dependent variables, the
22,2 second-stage analysis of the DEA results uses a standard Tobit model, while for the SFA, the
estimation method used is the POLS. The second-stage analysis is conducted using data in
the three phases to reflect different periods of the business cycle. The first period of 2005–
2007 is before the crisis, followed by the crisis and prerestructuring of the banking sector
from 2008 to 2011, and the final phase represents the system restructuring period of
2012–2017.
214
3.4 Data
The study uses the annual panel data collected from 34 Vietnamese commercial banks,
including 5 more 50% state-owned commercial banks (SOCBs), 26 joint stock commercial
banks (JSCBs) and 3 joint venture banks (JVBs), provided by Orbis Bank Focus for the period
2005–2017. In addition, the macro data collected from the World Bank ensure reliability.
Table 1 presents a summary of the descriptive statistics for the whole study period of the
variables used in the models of bank efficiency.
In the vein of Fiorentino et al. (2006, p. 10), two important characteristics considered are
developments over time and different banking group membership which affect SFA and
DEA estimates. Therefore, efficiency frontiers are estimated not only for annual samples
but also according to banking groups. The combination of the two characteristics is also
considered for pooled samples. As a result, four samples exposed to SFA and DEA are
respectively the following: (1) pooled over 13 years and three banking groups (All); (2)
pooled banking pillars per year (years); (3) banking group specific frontiers pooled overall
years (groups) and (4) separate banking pillar frontiers each year (both). Obviously, if
these two characteristics affect efficiency scores measured by SFA and DEA the most, the
differences between both measures in the last sample is expected to be the least
(Fiorentino et al., 2006, p. 10).

4. Empirical results
4.1 Cost efficiency by the DEA method
The average cost efficiency of Vietnamese commercial banks obtained under the DEA
method is shown in Table 2. The mean efficiency is not informative about the level of
efficiency of a banking system but only a representation of the central tendency of the relative
efficiencies.
It can be seen from the observation of the mean efficiency for each sample over year.
During the study period (2005–2017), the average cost efficiency of the pooled banking sector
is lowest at only 0.6075 compared to the different samples. Consistent estimates may be found

Variables Obs Mean Median Sta. Dev. Min Max

Total cost (TC) 410 7,967 3,032 12,276 7 67,613

Loans (Q1) 410 72,714 20,223 135,850 64 876,238
Other earning assets (Q2) 410 45,600 21,172 61,881 37 485,696
Off-balance sheet items (Q3) 410 18,110 2,672 37,532 0 336,905
Deposits 410 81,878 24,440 145,543 40 1,007,851
Staff cost 410 995 257 1,826 2 11,195
Table 1. Physical capital 410 1,273 508 1,948 1 11,437
Descriptive statistics of Price of deposits (W1) 410 0.094 0.079 0.052 0.023 0.393
variables used in the Price of staff (W2) 410 0.143 0.134 0.075 0.008 0.415
DEA and SFA models Price of physical capital (W3) 410 1.053 0.729 1.269 0.052 16.227
Years All Years Groups Both
Cost efficiency
of Vietnamese
2005 0.6017 0.7833 0.6637 0.9102 banks
2006 0.5524 0.3208 0.5992 0.8676
2007 0.5877 0.6758 0.6494 0.8295
2008 0.5066 0.7609 0.5778 0.9371
2009 0.5660 0.8844 0.6063 0.9497
2010 0.6512 0.8164 0.6677 0.8612 215
2011 0.7028 0.7547 0.7382 0.8920
2012 0.5783 0.7619 0.6298 0.9434
2013 0.5594 0.7874 0.6159 0.9290
2014 0.5677 0.7733 0.5850 0.9389
2015 0.5974 0.7907 0.6436 0.9324 Table 2.
2016 0.6612 0.7574 0.6842 0.8856 The mean cost
2017 0.7655 0.7645 0.7943 0.8940 efficiency scores under
2005–2017 0.6075 0.7409 0.6504 0.9054 the DEA method

in the sample of banking groups with the mean cost efficiency of 0.6504. The variability of
DEA in both “All” and “Groups” models have significant similarity over time. On the other
hand, the results of DEA estimates of separate banking groups each year provide the highest
mean cost efficiency of 0.9054. In general, cost efficiency of the “Years” sample are lower than
the “Both” sample but higher than the others, except for 2006; the cost efficiency from the
“Years” model has dropped considerably to only 0.3208, much lower than the level of the other
samples.

4.2 Cost efficiency by the SFA method

Table 3 presents the average of annual cost efficiency of Vietnamese banks estimated by the
SFA method. For the pooled or separate banking groups over all years, the cost efficiency of
banks has improved over time and is gradually approaching the optimal level. In general, the
cost efficiency gap between these two samples is not large and tends to narrow over time. On
the other hand, the cost efficiency of the SFA model for the models taking into account the
effects of time-varying factors has significant variations throughout the study period. In the
first phase, the “Years” model has higher cost efficiency than the two models without taking
into account the effect of time. However, from 2013 onwards, the results tend to be the
opposite. Meanwhile, the cost efficiency of banks by the “Both” model is also outperformed in
the early stages but is gradually reaching the cost efficiency of the two models without the
effect of time factor from 2012 to now.
In summary, the results obtained from both efficiency frontier models are strongly
influenced by the time factor rather than the banking group, especially with respect to the
SFA method. The mean cost efficiency of the two overall time models is highly consistent
between the pooled banking groups and the individual banking groups for both the DEA and
SFA approaches, while the differences in the models taking into account the effects of time
variance are significant.

4.3 The comparisons of cost efficiency under DEA and SFA

4.3.1 Comparison of effective distribution. Table 4 shows a number of distributional
characteristics of the cost efficiency obtained under the two methodologies. Overall, the mean
cost efficiency according to SFA is higher than that for DEA. Moreover, when increasing the
homogeneity of the sample, either methods react significantly differently. Minimizing the
differences across banking groups and time leads to a significant increase in DEA scores
JED Years All Years Groups Both
22,2
2005 0.7819 0.9163 0.7374 0.9981
2006 0.8356 0.8772 0.7992 0.9615
2007 0.8738 0.9981 0.8464 0.9331
2008 0.9060 0.9222 0.8880 0.9818
2009 0.9290 0.9368 0.9164 0.9577
216 2010 0.9468 0.9987 0.9380 0.9473
2011 0.9592 0.9988 0.9530 0.9988
2012 0.9704 0.9987 0.9662 0.9663
2013 0.9780 0.9177 0.9750 0.9745
2014 0.9833 0.9986 0.9813 0.9959
Table 3. 2015 0.9871 0.9396 0.9860 0.9849
The mean cost 2016 0.9901 0.9446 0.9897 0.9986
efficiency scores under 2017 0.9927 0.9366 0.9924 0.9956
the SFA method 2005–2017 0.9334 0.9526 0.9207 0.9765

DEA SFA
All Years Groups Both All Years Groups Both

Mean 0.6044 0.7411 0.6476 0.906 0.9334 0.9535 0.9208 0.9755

Median 0.5665 0.79 0.605 1 0.9601 0.9972 0.9729 0.9979
Std. Dev. 0.1864 0.2586 0.2099 0.0203 0.0881 0.0811 0.1173 0.0632
Table 4. Min 0.248 0.007 0.248 0.348 0.3585 0.5607 0.3226 0.5756
Descriptive statistics of Max 1 1 1 1 0.9992 0.9999 0.9997 0.9999
cost efficiency Skewness 0.6548 0.8725 0.3583 1.439 2.5937 2.336 2.3087 3.7855
according to SFA Kurtosis 2.5741 3.0915 1.9013 4.1522 11.666 8.1495 8.4157 18.1363
and DEA Obs 410 410 410 410 410 410 410 410

from as low as 60.4%–90.6% in the most stratified sample while SFA mean efficiency
increases only 5.5%. The inconsistency between two different efficiency measures is further
illustrated by standard deviations, skewness and kurtosis of efficiency scores. Except for the
sample stratified by both banking group and time, the SD of the SFA efficiency is generally
lower than that of the DEA efficiency. This proves that the SFA efficiency measure is less
volatile than DEA.
On the other hand, skewness in Table 4 shows that the cost efficiency under SFA is more
asymmetric than those of DEA. The former is relatively close to one or closer to full efficiency
than to full inefficiency. The former means that banks are relatively close to one or closer to
full efficiency than to full inefficiency. Finally, the kurtosis of effective distribution according
to the SFA method is much higher than that of the DEA. These results are consistent with
Bauer et al. (1998) and Delis (2009).
In the DEA results in each year, a relatively large proportion of the banks is considered to
be completely efficient as the efficiency frontier is established by a relatively large number of
banks. Meanwhile, the efficiency frontier estimated by SFA is not a linear combination of the
best performing observations but allows for measurement error. Figure 1 plots the efficiency
scores obtained by SFA and DEA for all bank observations over time in turn for each sample.
In summary, the comparison shows that there are some differences in distribution
characteristics of the cost efficiency provided by the two different approaches. These
differences may be due to different assumptions in each approach (Weill, 2004). However,
these differences are not too serious a matter of deciding which method to encourage using.
If different approaches can produce the same performance rankings, managers can still draw Cost efficiency
some rational policy conclusions from the cost efficiency scores analysis. Thus, the study of Vietnamese
then conducts an analysis of whether effective ranking orders according to different
approaches are actually consistent.
banks
4.3.2 Efficiency rankings. Table 5 describes the Spearman rank-order correlation
coefficients across methodologies and samples. In general, rankings in the family of DEA
method are more consistent than that of SFA. The correlations are on average higher for DEA
(over 43%) compared to SFA (below 30%). However, the average of the coefficients between 217
the two different families, shown in the lower left panel of Table 5, is only over 22%. Hence,
two efficiency models generally do not rank banks in the same order, and thus the conclusions
and policies drawn from these ranking orders may be contradictory.
An interesting result is that the rank correlation improves as both methods are used for
the same samples of banking-group specific or both separate pillar and annually. The rank
order correlations in these two cases are on average 35%. Thus, the same efficiency
ranking of Vietnamese banks in the same order can be generally relied on DEA and SFA
only for relative homogeneous samples. This has seemed to be a drawback of DEA because
standard nonparametric methods do not take into account the heterogeneity and explain
the difference between banks only as inefficiency (Fiorentino et al., 2006, p. 13). In addition,
Table 5 also provides an inference of the relative advantages of group effects over time
effects for the two methodologies passing from the fully pooled sample to the stratified
subsamples. In particular, the group effect is severe than the time effect for DEA (reducing
correlation from 100% to 29% instead of 79.6%), while for SFA (correlation reduces to
21.2% resp. 86.6%).
1

1
0.8
0.8

SFA (Groups)
SFA (All)

0.6
0.6

0.4
0.4

0.2

0.2 0.4 0.6 0.8 1 0.2 0.4 0.6 0.8 1

DEA (All) DEA (Groups)
1
1
0.9

0.9
SFA (Both)
SFA (Years)
0.8

0.8
0.7

0.7

Figure 1.
Comparison of
efficiency score
0.6

0.6

estimated by DEA
0 0.2 0.4 0.6 0.8 1 0.2 0.4 0.6 0.8 1 and SFA
DEA (Years) DEA (Both)
 22,2
JED

218

methods
Table 5.
The consistency of
efficiency ranks across
DEA SFA
All Years Groups Both All Years Groups Both

DEA All 1
DEA Years 0.2903*** 1
DEA Groups 0.7961*** 0.3018*** 1
DEA Both 0.4337*** 0.3025*** 0.4897*** 1
SFA All 0.2160*** 0.1504*** 0.2088*** 0.1932*** 1
SFA Years 0.2550*** 0.2059*** 0.2606*** 0.1458*** 0.2120*** 1
SFA Groups 0.3023*** 0.1828*** 0.3735*** 0.2002*** 0.8655*** 0.2691*** 1
SFA Both 0.2175*** 0.1155** 0.2642*** 0.3213*** 0.0886* 0.1972*** 0.1524*** 1
ROAA 0.2049** 0.2779*** 0.1826* 0.0546 0.2904*** 0.0520 0.3097*** 0.0688
ROAE 0.2749*** 0.1162 0.2578*** 0.1606 0.3260*** 0.0401 0.2455*** 0.0424
Note(s): (*, **, ***) correlation coefficients are significant at the level of 10%, 5% and 1%, respectively
On the other hand, Table 5 also shows that the efficiency scores are not strongly correlated Cost efficiency
with the traditional accounting-based measures (return on average equity – ROAE and of Vietnamese
return on average asset – ROAA) for evaluating bank performance. This low magnitude is in
line with almost previous researches (Bauer et al., 1998; Koetter, 2006; Fiorentino et al., 2006;
banks
Katharakis et al., 2014, and Silva et al., 2017). In addition, the all significant correlations are
positive, indicating that the efficiency frontier measures contain additional information
compared to the traditional performance ratios. It is noteworthy that the correlations between
the SFA scores and traditional performance measures are in some cases larger than for DEA 219
but also more varying across samples. Furthermore, much of the difference in performance
rankings between traditional measures and cost efficiency are explained by the difference in
samples according to banking pillars rather than time. Therefore, it is also important to
control the systematic differences between various types of banks.
4.3.3 The consistency of the most and least efficient banks. Even if the ranking order of
banks is inconsistent, the methods may still be meaningful for banking management
purposes if they are consistent in determining which are the most and least efficient banks
(Bauer et al., 1998, p. 105). This comparison is based on the idea of calculating the number of
banks that are among the most (or least) effective banks not only under the DEA but also
under the SFA. Table 6 presents the correspondence of extreme performers identified across
both methodologies. The upper right triangle of the matrix in Table 6 reports for each pair of
methods with various samples the proportions of banks that are identified simultaneously by
both frontier efficiency methods to exhibit efficiency scores in the top 25%. For instance,
54.9% of the banks identified in the highest quarter by DEA in the pooled sample are also
identified to be in the top 25% by SFA. If perfect correspondence gives a 100% level, a value
of 54.9% indicates normal consistency.
In general, the correspondence between DEA and SFA for identifying bottom performers
in the lower left triangle seems to be higher than for identifying top ones in the upper right of
matrix. On average, the correlation of the least efficient banks identified by the two methods
is about 61.4%, while the average correlation of the most effective banks is only 57.4%.
Furthermore, there is no significant difference of the extreme performers taken care of within
each method. The correspondence between the DEA samples is at the average of 69.8% for
the worst and 67.5% for the best. In turn, the correspondence between the SFA samples is
69.8 and 65.2%. Therefore, the frontier efficiency techniques in identifying the worst banks
are more consistent than in identifying the most effective banks.

DEA SFA
All Years Groups Both All Years Groups Both

DEA All 1 0.7059 0.7745 0.6373 0.5490 0.5882 0.6667 0.5882

DEA Years 0.5784 1 0.6471 0.6863 0.5294 0.5882 0.6078 0.5294
DEA Groups 0.8922 0.5882 1 0.5980 0.4608 0.5000 0.6373 0.4412
DEA Both 0.7255 0.6373 0.7647 1 0.5882 0.7157 0.5196 0.6667
SFA All 0.5882 0.5882 0.6078 0.5588 1 0.7353 0.6176 0.6961
SFA Years 0.5980 0.6667 0.5784 0.5098 0.6765 1 0.5392 0.8235
SFA Groups 0.5686 0.6471 0.6176 0.5980 0.7647 0.6471 1 0.5000
SFA Both 0.6667 0.6471 0.7157 0.6667 0.6373 0.7451 0.7157 1
Note(s): This table shows the corresponding matrix of identified extremely efficient banks across Table 6.
methodologies. This matrix reports on each similarity ratio of a quarter of the lowest cost efficiency of banks Consistency of the
determined by different techniques, while the correspondence between DEA and SFA when determining the most (or least)
top quarter is presented in the upper right triangle effective banks
JED Table 7 shows some of the most (or least) efficient banks by the two methods. These banks are
22,2 ranked based on the average efficiency score of four samples for each method. There are three
of the 34 banks listed with the highest efficiency by both methods – Bank for Investment and
Development of Vietnam (BID), Vietnam Joint Stock Commercial Bank for Foreign Trade
(VCB) and Tien Phong Commercial Joint Stock Bank (TPB). However, only one bank with the
lowest efficiency appeared in both methods – National Citizen Commercial Joint Stock Bank
(NCB). The bank with the highest average efficiency under DEA is Vietnam Bank for
220 Agriculture and Rural Development (Agribank) while under SFA is Housing Bank of Mekong
Delta (MHB). The least efficient bank under DEA is Nam A Commercial Joint Stock Bank
(NamAbank) while under SFA is NCB.
4.3.4 The stability of efficiency frontier over time. For regulatory policy purposes, efficiency
measurement methods will be more useful if estimated cost efficiency is relatively stable over
time. Given the gradual volatility of the banking system in Vietnam, the effective ranking
order of banks is expected to be unlikely to change significantly in the short term. A bank
being currently very effective is not likely to become ineffective in the coming years; That is, it
is likely that the bank could maintain its effectiveness over the next few years (Bauer et al.,
1998, p. 106) unless there is a shock that is enough for the efficiency to fluctuate intensely in a
short run. In order to test the stability of the efficiency over time, the average Spearman
correlation coefficients in turn are calculated for each pair of yearly efficiencies for each of the
different methodologies. Using data from 34 banks for 13 years (2005–2017), the 78
correlation coefficients for efficiency pairs corresponding to the k-year apart (k 5 1, 2, . . ., 12)
will be calculated for each method. Table 8 presents the average rank-order correlations for
efficiency pairs by the number of years apart.
In general, the average correlation of efficiency is more consistent for all four samples
according to DEA. In particular, the average correlation coefficient for the DEA banking
group sample is highest at 0.752 when k 5 1. However, the correlation coefficients tend to
decrease gradually according to the magnitude of k. Most of the mean correlation coefficients
for larger time distances are lower. Even in some cases, the coefficients are negative,
indicating that the bank’s ranking order has a considerable disturbance so that effective
banks this year may no longer be effective after k years and vice versa. Thus, the efficiency
frontier of Vietnamese commercial banks under the DEA method is only stable in the first 1–3
years. This shows that the efficiency rankings of banks have not changed significantly in the
early years but tend to be different as the intervals increase. Relative changes in efficiency
ranking over time are possible because the banking market is a competitive and dynamic
environment (Fiorentino et al., 2006, p. 15).
On the other hand, the average rank-order correlations under the SFA method are very
tight for the all and group samples where correlation coefficients are close to 1 in all years
apart. However, for the year and both samples, the correlations are very loose when the
average coefficients are close to zero. This shows the instability of the SFA method when
measuring the overall efficiency of the banking system on a yearly basis. Accordingly, the
SFA seems to be more appropriate to evaluate the effectiveness of each banking group.

Top 5 Bottom 5
DEA SFA DEA SFA

Agribank (0.9474) MHB (0.9888) NamABank (0.5691) NCB (0.8686)

BID (0.9282) SCB (0.9858) NCB (0.5775) STB (0.8786)
Table 7. VCB (0.9018) TPB (0.9807) KLB (0.5836) ACB (0.8886)
The five most (or least) CTG (0.9005) VCB (0.9787) SGB (0.5930) PNB (0.8982)
efficient banks TPB (0.8655) BID (0.9784) LPB (0.5990) DAB (0.9129)
k-year 1 2 3 4 5 6 7 8 9 10 11 12

DEA All 0.740* 0.569 0.509 0.418 0.366 0.349 0.376 0.296 0.268 0.207 0.116 0.036
DEA Years 0.541 0.431 0.370 0.270 0.235 0.199 0.067 0.071 0.053 0.025 0.021 0.317
DEA Groups 0.752 0.663 0.612 0.537 0.512 0.524 0.588 0.541 0.483 0.477 0.309 0.102
DEA Both 0.722 0.524 0.430 0.388 0.341 0.285 0.264 0.206 0.245 0.231 0.245 0.162
SFA All 1.000 1.000 0.999 0.999 0.998 0.997 0.997 0.996 0.995 0.993 0.991 0.989
SFA Years 0.235 0.125 0.029 0.042 0.018 0.029 0.021 0.050 0.019 0.162 0.024 0.305
SFA Groups 0.997 0.990 0.981 0.970 0.958 0.944 0.929 0.911 0.890 0.867 0.848 0.801
SFA Both 0.200 0.082 0.120 0.045 0.077 0.116 0.055 0.066 0.064 0.180 0.170 0.284
Note(s): *Each coefficient in this table represents the average correlation of the pairs of efficiency scores separated by k-years (k 5 1, 2, . . ., 12) for each methodology
across a 13-year period (2005–2017). Corresponding to each k-, the coefficient is reported as the mean of the (13-k) the correlation coefficients of the efficiency pairs with the
interval of k-year. All correlation coefficients are significant at the 1% level
banks
Cost efficiency
of Vietnamese

221

The stability of

intervals
Table 8.

efficiency across k-year

JED 4.3.5 The determinants of efficiency frontier. This section provides a second-stage regression
22,2 analysis using the obtained cost efficiency as dependent variables to assess the importance of
different determinants of bank efficiency. The results are useful in order to offer solutions to
improve the cost efficiency of banks over time.
Table 9 reports the results of the second phase analysis. Although the relationship
between bank size and efficiency is not consistent in the precrisis period, the DEA-based
estimates provide evidence that the larger banks are more efficient in the latter two periods.
222 On the contrary, the effect of liquidity on efficiency has been consistently achieved in the
prerestructuring periods, but is not so clear afterward. The consistent positive effect of loan-
to-deposit ratio shows that the banks holding liquid assets at a minimum are more efficient
because loans generate a major source of interest income for banks. On the other hand, there
is no clear evidence of the relationship between the ability to manage bank costs and the cost
efficiency by the both approaches. However, in the only DEA model, banks with higher
productivity will be more efficient. There is also evidence that nonperforming loans have a
negative impact on bank efficiency in times of crisis. The type of bank ownership is clearly
related to efficiency. Banks that are more than 50% owned by the state are more efficient
than joint stock banks. This is true regardless of whether one considers the DEA or SFA
models in all period. In addition, in only DEA-based estimates beyond the crisis period,
competition actually has a significant negative impact on bank efficiency. A higher Lerner
index or a lower level of competition shows the increase in efficiency. This result is
consistent with the structure–conduct–performance (SCP) paradigm. The relationship
between the sector growth and the bank efficiency is unclear in the previous periods, but the
SFA-based estimates assert that the development of banking sector leads to banks being
more efficient during the restructuring period. Finally, the diametrical opposite is also
found in the relationships between macroeconomic factors and efficiency by two different
models.

5. Conclusion
The study is conducted to compare the cost efficiency of Vietnamese commercial banks by
the DEA and SFA methods to assess the similarity in the issuance of policies. The results
show that the SFA models estimate higher efficiency scores and less significant variability
than the DEA models. Moreover, the mean cost efficiency calculated for each banking
group is lower than for that taking into account the effect of time factor on both approaches.
Fiorentino et al. (2006, p. 17) interprets this result as the parametric nature of SFA found to
be less sensitive to external factors due to measurement error. Meanwhile, because DEA
uses a deterministic boundary to full efficient banks, this method is much more sensitive to
the choice of the banks included in the sample. When evaluating the relative efficiency of
the three pillar system of Vietnamese banks, higher heterogeneity in the data leads to low
mean efficiency because other factors affecting cost efficiency as technical fluctuations
over time are taken into account. Subsequently, the sensitivity of the average sector
efficiency levels is estimated by setting increasingly homogeneous samples across years
and banking groups. The results show that the SFA and DEA measures provide the highest
scores when comparing only banks of one group per year. Therefore, DEA should be used
with care because there is clearly possibility to believe the dominance of measurement
errors.
On the other hand, the comparison shows that there are some differences in the
distribution characteristics and the ranking order correlation of the efficiency scores
provided by two different methods in this study. The analysis of bank rankings across
methodologies and samples does not show evidence that both measures exhibit a high
correlation in rank order. However, the rankings in the DEA family are more appropriate
 DEA SFA
Dependent variable All Years Groups Both All Years Groups Both
Estimation (1) (2) (3) (4) (5) (6) (7) (8)

2005–2007
LnTA 0.0278 0.0301 0.0008 0.1487*** 0.0120* 0.0273** 0.0225** 0.0190*
LTD 0.3348*** 0.0442 0.2441*** 0.2816*** 0.0050 0.0315 0.0129 0.0022
CTI 0.0127 0.0643 0.0055 0.0775 0.0060 0.0321* 0.0129 0.0199
LP 0.0005 0.0952 0.0203 0.1011 0.0129 0.0111 0.0210 0.0209
NLR 0.0039 0.0023 0.0036 0.0142 0.0009 0.0031 0.0026 0.0017
State 0.1122** 0.0132 0.3887*** 0.0146 0.0406 0.0627* 0.1395* 0.0741**
Lerner 0.5614*** 0.2170 0.6286** 0.9322 0.0514 0.0363 0.0144 0.0086
BSD 0.7324** 4.3056*** 0.6232 2.5801*** 0.5533*** 0.1789 0.6289*** 0.3857*
INF 1.7038** 13.189*** 2.1042* 1.6688 0.4840*** 2.1152 0.5733** 0.3718
GDP Omitted Omitted Omitted Omitted Omitted Omitted Omitted Omitted
2008–2011
LnTA 0.0848*** 0.0096 0.0463*** 0.0571* 0.0087 0.0003 0.0118 0.0012
LTD 0.2929*** 0.1347* 0.2604*** 0.3792*** 0.0049 0.0446* 0.0095 0.0537**
CTI 0.0002 0.0237** 0.0027 0.0034 0.0019* 0.0018 0.0020 0.0021
LP 0.0288* 0.1793*** 0.0868*** 0.0932** 0.0064 0.0055 0.0081 0.0035
NLR 0.0073 0.0090 0.0078 0.0309** 0.0027* 0.0017 0.0040* 0.0032
State 0.0081 0.2474*** 0.2126*** 0.2355** 0.0284 0.0213 0.1175*** 0.0430*
Lerner 0.2077 0.1395 0.1437 0.4751 0.0148 0.0652 0.0353 0.0385
BSD 0.3769** 1.1436*** 0.0706 1.2230*** 0.2915*** 0.4207*** 0.3601*** 0.0825
INF 0.2649 2.5451*** 0.1926 0.2370 0.1167** 0.2453 0.1498* 0.4721***
GDP 2.1399 8.1886* 1.3029 2.0597 1.2713*** 0.3068 1.5504*** 2.9656**
2012–2017
LnTA 0.1207*** 0.0505 0.0546*** 0.0384* 0.0005 0.0006 0.0032 0.0059
LTD 0.4575*** 0.0067 0.4660*** 0.4376*** 0.0143*** 0.0589* 0.0110* 0.0382*
CTI 0.0038*** 0.0034 0.0030* 0.0043* 0.0000 0.0008 0.0002* 0.0003
LP 0.0056 0.1866*** 0.0513*** 0.0757*** 0.0001 0.0075 0.0021 0.0112
NLR 0.0024 0.0064 0.0122 0.0004 0.0004 0.0060 0.0006 0.0033

(continued )
banks
Cost efficiency
of Vietnamese

223

Table 9.

regression results
Second-stage
 22,2
JED

224

Table 9.
DEA SFA
Dependent variable All Years Groups Both All Years Groups Both
Estimation (1) (2) (3) (4) (5) (6) (7) (8)

State 0.0437 0.5157*** 0.1384*** 0.1461 0.0041 0.0140 0.0286*** 0.0084

Lerner 0.2899** 0.0941 0.5929*** 0.8672*** 0.0028 0.0298 0.0148 0.0126
BSD 0.1978 0.2379 0.0445 0.4928 0.0655*** 0.3051** 0.0762*** 0.1944**
INF 0.2692 2.9260 1.7787 2.0165 0.1829** 2.8109*** 0.2211* 1.0878*
GDP 0.9704 6.4634 12.108 3.9897 0.5974 17.846*** 0.6544 6.8068*
Note(s): (*, **, ***) correlation coefficients are significant at the level of 1%, 5% and 10%
than SFA. This shows the importance of checking the robustness of the efficiency Cost efficiency
ranking using different methods. of Vietnamese
For the stability of efficiency over time, it is clear that ongoing fluctuations in the industry
over the past decade, such as restructuring and increased competition, have had a significant
banks
impact on the efficiency rankings over the years. The DEA-based models seem to show a
more consistent variation over time, while the SFA method only provides the stable rankings
when only applying samples without the time effect. Thus, when assessing the efficiency
frontier of banks, it is necessary to consider the change over time that is due to many causes. 225
The two methods also show a fairly high consistency in identifying the most efficient
and least efficient banks for all samples as all correlation coefficients are greater than 0.5.
In addition, the results also show that the obtained cost efficiency has a positive but not
significant correlation with traditional accounting-based measures. This indicates that
efficiency measures contain additional information compared to traditional performance
ratios. Finally, an analysis of the development of the effectiveness of Vietnamese banks
over time also poses many challenges to address, such as increasing bank size, enhancing
labor productivity, reducing nonperforming loans, control of competition and inflation.
Because banks have different operating periods, the research data are unbalanced. There
are a few banks that only provide data for eight years, while the maximum study period of
other banks is up to 13 years. This study is limited not only to the number of observations in
the sample but also to the scope of only one country. Therefore, further studies may consider
using a larger sample set of countries and extending the study period to provide a more
comprehensive analysis of the cost efficiency of banks in emerging countries.

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Corresponding author
Phong Hoang Nguyen can be contacted at: [email protected]

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