Income diversification and financial performance of commercial banks in Vietnam

Abstract

PurposeThe purpose of this paper is to investigate the impact of income diversification on the financial performance of commercial banks in Vietnam over the period 2007–2017. It then provides additional analysis to examine whether the diversification–performance nexus is conditioned upon bank experience and ownership structure.Design/methodology/approachThe financial information of each bank were manually collected from bank annual reports. In the empirical model, a number of modern econometric techniques, including panel OLS with fixed effects and a two-step system GMM estimator, were utilised to achieve the research objectives.FindingsThe empirical results show that income diversification has a positive impact on banks’ performance. However, the effect varies across different types of banks. Specifically, the authors find that while diversification benefits state-owned and foreign banks, it exhibits a detrimental effect on the financial performance of other non-state owned domestic banks. In addition, the authors further find that the positive impact of diversification is more prominent for banks with more experience in the market.Originality/valueThis study is among the first to empirically investigate the relationships between income diversification and the financial performance of commercial banks in Vietnam. In this sense, the findings of this study could draw important inferences for researchers, policy makers and bank managers towards more appropriate diversification strategies, to ensure the safety and soundness of the whole banking system.