Diversification and bank efficiency in six ASEAN countries

Abstract

This study examines the impact of diversification on cost and profit efficiency of commercial banks from six ASEAN countries over the period 2007–2014. Measured using the stochastic frontier approach (SFA), the average cost efficiency scores for these countries range from 0.7922 to 0.8108 and the average profit efficiency scores range from 0.3009 to 0.3385. The study analyzes three dimensions of diversification: asset, funding, and income. The regression results indicate that more income-diversified banks have lower cost efficiency while more asset-diversified banks have only lower persistent cost efficiency. More funding-diversified banks enjoy higher profit efficiency, while more asset-diversified banks enjoy only higher persistent profit efficiency. Funding-diversified banks with majority government ownership demonstrate higher cost efficiency but lower profit efficiency than other banks, while both funding and asset diversification make foreign banks less profit efficient.