Abstract
The paper analyzes how the effects of loan portfolio diversification on bank profitability differ according to bank size and state ownership. Through data on Vietnamese banks during 2008–2019 and the dynamic panel model, we strongly confirm the average adverse impacts of sectoral loan portfolio diversification on bank profitability. Further analysis indicates that the drawback of loan portfolio diversification is mitigated for larger banks rather than smaller counterparts. Regarding the asymmetric effects induced by bank ownership, bank profits increase with loan portfolio diversification at state-owned banks, as opposed to the cost implication found for private banks. Additionally, the paper documents the nonlinear inverted U-shaped relationship between loan portfolio diversification and bank returns as a bank risk function. Concretely, increased bank risk could diminish the harmful effects of loan portfolio diversification on bank returns; when the level of risk is exceptionally high, these harmful effects may rise again.
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