Bank Market Power and Revenue Diversification: Evidence from Selected ASEAN Countries

Abstract

This paper examines the association between bank market power and revenue diversification using a sample of 153 commercial banks from five Association of Southeast Asian Nations (ASEAN) member countries (Indonesia, Malaysia, the Philippines, Thailand and Vietnam). The results indicate that banks with market power (in both loan and deposit markets) earn higher income from non-traditional activities. It shows that market power allows banks to identify new growth opportunities in non-traditional activities and deliver greater bargaining capacity with their customers. This relationship, however, is non-linear suggesting that at lower degrees of market power, managers concentrate on revenue diversification strategies. In contrast, those with greater market power focus more on traditional interest-based products. We also find that this association between bank market power and revenue diversification has changed over time, suggesting that the credit losses experienced earlier, during and after the Asian financial crisis have encouraged ASEAN banks (especially those with market power in deposits) to diversify into non-traditional activities to compensate for their excessive losses. When the markets recovered and loan demand increased, however, traditional interest-based business becomes more important. These results remain consistent across all models providing robust results.