The impact of size on income diversification: an empirical study on commercial banks in Vietnam

Abstract

Banks are the engine of the economy. Therefore, bank performance has a direct impact on the development and security of the entire economy. The main source of income for commercial banks comes from lending and capital mobilization activity. Competition in the banking industry is increasingly fierce, not only among domestic banks but also with foreign banks. Thus, banks are trying to diversify their income sources, especially from non-interest activity. Most previous studies study the relationship between the bank's income diversification and the increase in the proportion of income from non-interest products and services. However, the relationship between income diversification and bank scale has not been studied as much. This paper examines the relationship between income diversification and commercial bank size in Vietnam. The study applies a panel data regression model with a sample of 23 commercial banks in Vietnam in the period 2012–2020, using the generalized least squares method to overcome variable variance and autocorrelation in the research model. Our results show that bank size has a positive impact on the degree of income diversification. At the same time, size has a larger impact on income diversification at large banks than small banks. Therefore, smaller banks need to concentrate on developing modern technology systems as well as improving the quality of personnel and operating experience rather than investing in new products and services. Further research may expand to include commercial banks of countries or regions in order to get a deeper look at the impact of size and some economic factors on income diversification.