Digital transformation under the pressure of uncertainty in the banking sector

The study explores how banking uncertainty affects digital transformation, utilizing data from commercial banks in Vietnam from 2007 to 2022. We reveal that uncertainty hampers the level of digital transformation by banks. This pattern persists after conducting extensive robustness checks and addressing potential endogeneity concerns. Our channel tests indicate that banking uncertainty impedes digital transformation by elevating bank risk and diminishing returns. This finding supports the notion that banks experiencing financial stress might prioritize short-term stability over long-term digital investments. Further analysis shows that among the sub-areas of bank digital transformation, human resource infrastructure is the only area that does not significantly react to banking uncertainty. Moreover, we document that the adverse effects of uncertainty on digital transformation are more pronounced in banks that are well-capitalized and highly liquid, while larger banks and those listed on the stock exchange experience a mitigated impact.