How Do Noninterest Income Activities Affect Bank Holding Company Performance?

Abstract

We investigate whether noninterest income activities (both traditional and non-traditional), are associated with bank performance measures. We present evidence consistent with the theory that there is synergy between interest and noninterest income that improves performance. A decomposition of the main performance measure (ROA) into cost and revenue ratios reveals that the enhanced performance associated with noninterest income arises through both revenue and cost efficiency. In addition to ROA, we also use a risk adjusted performance measure and find consistent results. Our results also show that during the recent financial crisis, noninterest activities do not adversely affect BHC performance, and in some cases they even improve performance. We further address issues of the persistence of ROA and endogeneity by using a dynamic panel data approach, and our results remain consistent.