Income diversification and bank performance: an evidence from emerging economy of Pakistan

Abstract

Purpose The income structure of banks has undergone a notable change in recent decades; therefore, non-interest-based activities have gained much attention. This paper aims to examine the impact of income diversification on bank performance in Pakistan.Design/methodology/approach A balanced panel data set of 20 Pakistani commercial banks is used from 2007 to 2020. The random effect model is employed to test the relationship between income diversification and financial performance.Findings The empirical results indicate a significant positive impact of income diversification of banks on risk-adjusted returns on assets and equity. Moreover, while banks' risk-adjusted profit performance improves with the increase in bank size, equity ratio and loan ratio, it deteriorates with high credit risk and technology. However, geographical diversification does not explain financial performance in all the risk-adjusted return on equity models. Among the macroeconomic factors, the interest rate influences bank risk-adjusted returns positively, whereas gross domestic product and inflation rate have a negative effect on banks' financial performance.Originality/value To the best of the author's knowledge, this study is the first to empirically investigate the relationships between income diversification and the risk-adjusted profits of Pakistani-listed commercial banks. This study has implications for regulators and policymakers of commercial banks.