The Interrelationship between Net Interest Margin and Non-Interest Income: Evidence from Vietnam

Abstract

The findings show a negative two-way link between non-interest income and net interest margin, thus supporting the subsidisation hypothesis. Furthermore, non-interest income is found to have a negative impact on risk-adjusted returns. When observing this relationship in sub-samples, the findings indicate that the negative impact of non-interest income on risk-adjusted returns still holds in the first subsample (2006-2011). The coefficient of non-interest income becomes positive but not significant for the subsequent period (2012-2015). In addition, the Spearman rank order correlations of returns on assets and non-interest income for both subsamples are negative. Together, we conclude that there are no diversification benefits in Vietnamese banking. The evidence suggests a trade-off between non-interest activities and traditional lending ones. In addition, the findings demonstrate that Vietnamese bank may use non-interest income to expand leverage and herd by coordinating non-interest income strategy during the economic downturns. Thus, the banking system may be exposed to greater risk. Our research has implications for bank supervisors, policy-makers and bank managers.