Digitalization and bank profitability: evidence from an emerging country

Abstract

PurposeThis study aims to investigate the effect of digitalization on bank profitability among Vietnamese banks.Design/methodology/approachThe research employs fixed-effects regression on a panel data of 32 banks in Vietnam during the period 2010–2021.FindingsThe study reveals a positive impact of digitalization on bank profitability. The result is robust to different measures and empirical settings. Not surprisingly, small banks and banks with high percentage of state ownership experience lower profitability than their peers. However, digitalization helps improve the profitability of these banks. This study explains the effect by showing that digitalization significantly reduces bank cost in terms of cost to income ratio and increases bank non-interest income through diversification into non-traditional products and services. In addition, the current stage of bank digitalization in Vietnam does not reduce banks’ employment costs since it requires staffs to support and operate the new system.Practical implicationsThe research findings are motivations for bankers and policy-makers in designing appropriate strategies toward digitalization. Investors can also consider highly digitalized banks as valuable investment.Originality/valueThis research extends the current literature on the relationship between digitalization and bank profitability, with a focus on commercial banks in Vietnam. Given the high involvement of the government and the dominance of several large banks in the banking system, the study also explores whether the effect of digitalization on bank profitability varies with the bank’s size and state ownership. Last but not least, the channels in which digitalization affects bank profitability are also examined.