Banking Relationship Ties to Firm Performance: Evidence from Food and Beverage Firms in Vietnam

This paper is aimed at analyzing the effects of banking relationship on performance of Vietnamese firms in Food and Beverage (F&amp;B), one of the highest potential sectors. Panel data of 170 observations covers 34 F&amp;B firms listed in the Vietnam stock exchanges in the period 2014-2018. The fixed effect model (FEM) is applied. The key findings are: First, short-term loan financing, leverage, and fixed asset ratios all negatively impacted on F&amp;B firm performance, while firm size and net profit margin had positive impacts. These findings were consistent with previous studies. Second, the opposite results with previous studies were: (i) negative corelation of ROE and number of banks firms working with, as F&amp;B firms were inefficient in selecting bank partners; (ii) positive relation of short-term liabilities ratio and ROA/ROE, as F&amp;B firms utilize other non-bank liabilities shortly; (iii) foreign ownership had negative relationship with ROA&amp; ROE. Foreign investors did not have significant roles in most F&amp;B firms. Third, long-term borrowing from banks, state ownership and ages all insignificantly correlated with firm performance. Recommendations to F&amp;B firms include: (1) Reduce the short-term loans and fixed assets investment, while increase the cheap equity funding sources via shareholders (2) Be selective in working with banks to have better fees and interest saved with banks. (3) Utilize other short-term liabilities, including payables and advances – the low-cost funding sources. F&amp;B firms have good bargaining powers in requesting advances from their clients. (4) Have smart buy-in strategies on foreign ownership.

The bank-firm relationships can bring benefits but also drawbacks to both parties. Following is the summary of literature review on this relationship. Benefits of bank-firm relationship for banks (Diamond, 1984); (Rajan, 1992); (Thadden, 1995) Banks can both acquire the cost-effectiveness in managing activities and find out diversification is an effective way to alleviate problem of the agency (Limpaphayom & Polwitoon, 2004); (Prowse, 1990); (Agarwal & Elston, 2001) Close bank-firm relationship plays a role as a solution to secure the creditors' wealth against the action of shareholders (Jensen & Meckling, 1976); (Weinstein, & Yafeh, 1998) Banking relationship is a useful tool used in reducing the information asymmetric and incentive issues Benefits of bank-firm relationship for firms (Bonfirm et al., 2018) Ongoing banking relationship with a clean credit record can be considered as a certificate for firm in defending the moral hazard problem (Best & Zhang, 1993); (Bonfirm et al., 2018) The more acknowledgement the public know about the bank loan; the higher company's share price can be (Hoshi, Kashyap & Scharfstein, 1990); (Belaid, Boussaada & Belguith, 2017); (Aristei et al., 2018); (Rajan & Petersen (n.d); (NguyenThu Hang et al, 2018) Strong relationship with bank ensures a stable financial background and a strong credibility for the firm, attracting outsiders to invest and consequently, diversifying the number of sources of financing in the future (Li et al., 2018); (Bonfirm et al., 2018); (NguyenThu Hang et al, 2018) Firms can reduce the expenditure and cost (Ongena & Degryse, 2001); (Le & Nguyen, 2012) Long-term banking relationship brings profit and avoids switching cost for firms (Hoshi et al., 1990) Banking relationship is helping firms to reduce the risk of financial during the economic turmoil by effectively maintaining the borrowings (Höwer, 2016) Close banking relationship can not only help companies avoid risk during the financial crisis but also have positive effects on the financially distressed firms (Campbell, 1979); (Aristei et al., 2018); (Strahan & Weston, 1998) The close banking relationship is more necessary to relatively small-sized firms Drawbacks of bank-firm relationship for firms (Diamond, 1991); (Ongena & Degryse, 2001); (Chen et al., 2016); (Yildirim, 2019); (Castelli, Gerald & Hasan, 2006); (Höwer, 2016) Bank may raise the required interest rate easily, which has negative effects to firms in relationship (Weinstein & Yafeh, 1998); (Rajan, 1992) The close relationship with bank tends to limit the firms from maximizing profitability as banks control over the firms in making investment Electronic copy available at: https://ssrn.com/abstract=3588989 (Weinstein & Yafeh, 1998); (Yasuda, A. 2005) (Agarwal, R. & Elston, J. A., 2001) (Arikawa, Y., & Miyajima, H., 2005) The deregulation in lending process will gradually turns the relationship to be less supportive to the funding process in long-term.

Data
The data of this research is derived from financial statements and published reports of Vietnamese officially listed firms on the F&B Industry in Hanoi Stock exchange and Hochiminh City Stock Exchange. Among 55 listed F&B firms, only 34 were chosen after omitting the firms with missing data and outliers (with Z-score analysis) to avoid interruption during the analysis process. Therefore, total final sample of 34 listed F&B firms in 5-year period (2014-2018) includes 170 observations for this study. The full name of these firms presents in appendix A.4.

Research approach and model
With panel data, either fixed effects model (FEM) or random effects model (REM) is proposed for regression analysis. The Hausman test is used to check the difference between the coefficient estimates observed by fixed and random effect at statistically significant level. Also, the heteroscedasticity and autocorrelation should be also tested and fixed in order to have a soundness estimation. Wald test is used to check heteroskedasticity while Durbin-Watson test is used to check autocorrelation. Following is the summary of research model and hypotheses bases on literature review in this article.  (Vu & Nguyen, 2013); (Nguyen, 2017) Short-term liabilities ratio Short_term_liab ilities_ratio ℎ − Negative (Haseed & Muhammad, 2013); (Ben, 2017) Firm leverage Leverage Negative (Nguyen, 2009); (Pham, 2011); (Ilyukhin, 2015) (Nguyen, 2013); (Nguyen, 2017) Net profit margin Two research models are applied as followed.

Overview
Vietnam has been one of remarkable development markets with almost 97 million population in goldern age and fast-growing economy (GDP growth rate of 6.51%/year in period 2000-2020, increased gradually from 5.98% in 2014 to 7.02%) (Trading Economics, 2020; GSO, 2014-2019). However, Vietnam is still the bank-based economy, with more than 80% of firms' funding sources from banking system (Vuong, 2019;SBV, 2020). Even for listed firms, borrowing from banks are still common.  (Lien Nguyen, 2018;Kantar, 2019;Nielson, 2020;Le Ha, 2020). The F&B industry is expected to maintain strong growth momentum until 2020 with an average growth of 10.9% per year thanks to household income improvement and consumer trend on higher value products will dominate the tastes consumption (Kantar, 2019;Nielson, 2020). According to Statista (2019), revenue in the F&B segment amounts to USD 289 million in 2020. Also, revenue is expected to show an annual growth rate (CAGR 2020-2024) of 10.1%, resulting in a market volume of USD 423 million by 2024. The golden age population with eat-out habits lightened the future for Vietnamese F&B sector (Lien Nguyen, 2018;Kantar, 2019;Nielson, 2020;Le Ha, 2020). The F&B in Vietnam may still continuously attract investment from businesses and the participation of diverse global business chains since the profitability of the F&B industry in Vietnam is still promising. However, the government Decree 100/2019/ND-CP in effective from January 2020 on penalties for alcohol-related violations by vehicle operators has been negatively affected the growth rate of the F&B industry significantly (GoV, 2019; Le Ha, 2020). In addition, the COVID-19 pandemic has spread to almost all countries in the world including Vietnam, which may create the global economic depression worldwide (Duffin, 2020;McKinsey, 2020). It may strongly impact on the vietnam GDP's growth in general, the revenue of the F&B industry in particular.

Results and discussions Descriptive statistics
The statistical description summary of variables in the appendix A.1 showed that the Vietnamese F&B firms have a diversified range of banking relationship, which can up to 20 banks; but in general, most firms only maintain about 3 to 4 relationships. On average, short-term bank borrowings takes up 32% of the firms' total debts, but long-term loans just accounted for 5.8%. In addition to borrowing from banks, firms also borrowed short-term mainly from other sources, mainly under payables (average 90% of liabilities are short-term). F&B firms have wide range of leverage ratio, from 10%-80%, but on average, the F&B firms utilize its own equity than debt, with average leverage ratio of 42%. Fixed assets are minor for these firms, with 26% of total assets. There is no Vietnamese F&B firm that is totally owned by state or foreign partners, with the portion up to 60-62% of total ownership. Most of the firms listed in the stock exchange have been established for long time, with average 25 years of operation.

Correlation matrix result
As stated in appendix A.2, variables in the model has not very high correlation case between any two variables (both dependent and independent) expect for the bank_num and bank_num^2 which are calculated based on each other and thus, the high correlation is reasonable. Size and bank_num, however, have a moderate relationship because their correlation is + 0.57, which also means that the bigger the firm size, the more bank relationships a firm has. It also implies that those identified variables are relevant and there is no need to conduct the sensitivity analysis on the effect of removing violated variables, no multicollinearity problem is detected in the model.

Hausman test for selecting the model
The result of Hasman test in appendix A.3 (p-value of 0.04) confirms that FEM should be applied for this regression.

Notes: (***) Significant at 1% level, (**) Significant at 5% level, (*) Significant at 10% level Source: Authors' compilation from primary data
From the regression results with two models, the key findings are: First, short-term loan financing, leverage, and fixed asset ratios all negatively impacted on F&B firm performance, while firm size and net profit margin had positive impacts. These findings were consistent with previous studies (Nguyen, 2009;Pham, 2011;Nguyen, 2013;Vu & Nguyen, 2013;Ilyukhin, 2015;Nguyen, 2017;Vo & Le, 2017;Mohammed & Andrew, 2019). It means that F&B firms have been using expensive short-term lending from banks, due to the interest rate fluctuation. The debts were also costly to F&B listed firms for in their capital structure, as equity source is now cheaper in Vietnam. Shareholders mostly did not pay attention to dividends. They bought firm shares because of the expected price increase. Investing in fixed assets heavily was also ineffective to firms due to the high propotion of depreciation, especially with industrial revolution 4.0. In addition, in this industry, big firms have strong comparative advantages thanks to their economies of scale and economies of scopes in penetrating huge market and diversifying various products. It also implies that the F&B firms still have potential to expand its size as they did not reach the best scale yet. Second, the opposite results with previous studies were: Electronic copy available at: https://ssrn.com/abstract=3588989 (i) Negative corelation of ROE and number of banks firms working with. It showed that F&B firms were inefficient in selecting bank partners, as average 3 banks to work with/firm seem too much. Some firms also worked with 20 banks. Therefore, these F&B firms did not get the highest preference rates for their loans and other services under bank's customer profitability analysis pricing policies.
(ii) Positive relation of short-term liabilities ratio and ROA/ROE. F&B firms who have low short-term loans from banks, but higher level of payables and advances got the better financial results, as these sources are nonor low cost. These F&B firms have strong bargaining powers thanks to their potential growth and good liquidity status. Therefore, they can ask suppliers and buyers to provide them with these facilities. Third, long-term borrowing from banks, state ownership and ages all insignificantly correlated with firm performance. the purpose of state ownership is for control or orient economy as well as divert firm objectives to social performance, but this also provides better access to the resources to meet the demand of companies. Therefore, in this situation, particularly in the context of F&B companies in Vietnam, these two effects of state ownership would cancel each other out, leaving no net effect on the firm's performance. For the age of firms, older firms may have been doing better in business with their experience; however, they also have slow adaptability to the change in technology to upgrade its quality of products. These effects might lead to no impact of firm age on firm performance. This insignificant result of age is consistent with Nguyen, Do & Trinh (2019) for all Vietnamese listed companies.

Recommendations
For improving firm performance and utilizing the bank relationship, the following recommendations are proposed for listed F&B firms in Vietnam.
First, reduce the short-term loans from banks and fixed assets investment, while increase the cheap equity funding available in the market. As firms avoid keeping unnecessary amount of short-term credit, they can eliminate high borrowings cost in short run and therefore, increase both the amount of profit gained and firms performance. To take this solution into action, companies should improve the managerial activities and process of production following the demand of markets. Also, applying more advanced technology in doing business and finally, acquiring better organized accounting procedure and market analysis with the purpose of enhancing the efficiency of bank credit. Limitation on the amount of fixed assets will save F&B firms significantly, as the fixed assets in this industry have very high depreciation rates, especially with industrial revolution 4.0. F&B firms can raise funding by issuing more shares to the public or to existing shareholders, as this is still the cheap funding source in Vietnam thanks to shareholders' expectation on pricing changes rather than dividends.
Second, be more selective in working with banks to have better fees and interest saved. Banks usually apply the customer profitability analysis pricing policies with clients having huge transactions in total. Therefore, reduce the relationship with banks down to 2-3 maximum, not up to 20. Choose the banks which can provide the whole packages of solutions to the firms to reduce all transaction opportunity costs.
Third, utilize other short-term liabilities, focusing on payables and advances -the low-cost funding sources. F&B firms have good reputation and advantages in requesting advances from their clients. They are in good position to ask for very low or zero payables or advances. This solution also can help to increase firm sizes.
Fourth, have smart buy-in strategies on foreign ownership. A reasonable ratio of foreign ownership can give firms advantages in having stronger financial background, more professional management and chances to study from people with long-term experience, while avoiding problems from information asymmetry and deconcentration from foreign ownership. To gain that ratio, board of director of firms should think carefully about how much foreign ownership is suitable for their ownership construction and how to use the strength of foreign shareholders in managing effectively.
Fifth, increase firm size to utilize the economies of scope and economies of scale in the market. F&B firms can do that by several ways: (i) increase equity and non-bank low cost liabilities such as payables, advances, (ii) issue subordinated debts; (iii) implement M&A with other firms.

Acknowledgement
This paper is part of the whole research for The Student Scientific Research Competition at National Economic University (NEU), Hanoi, Vietnam. We would like to send our special thanks to the School of Advanced Education Programs, NEU, for organizing this event for lightening up our research interests.