Non-interest Income Activities Research Articles

Do non-interest income activities matter for banking sector efficiency? A net interest margin perspective

This paper explores the effects of non‐interest income (NII) generating activities on banking sector efficiency in 152 countries from 1996 to 2017. Contrary to previous studies that examine the effects of diversification on banking performance at the micro‐level, this study seeks to provide new insights about the effects of diversification at the aggregate level on bank efficiency. This aspect offers a chance to capture the whole banking sector and provides a broader understanding of the effects of banking sector diversification. Our baseline results reveal that engaging in NII activities is positively associated with banking sector efficiency. Using the dynamic threshold regression method, we do not find a tipping point beyond which the benefits of NII activities have an adverse impact on banking sector efficiency. These results are insensitive to different groups of countries. Our findings generally suggest that banking liberalization contributes to the efficiency of the banking sector. In this sense, the findings of this study support banking sector diversification policies implemented in many countries since the 1980s and 1990s.

How do noninterest income activities affect bank holding company performance?

We investigate whether noninterest income activities affect bank performance measures, and we present evidence consistent with the theory that synergy between interest and noninterest income improves performance. A decomposition of ROA into cost and revenue ratios reveals that the improved performance associated with noninterest income arises mainly through revenue efficiency. We find consistent results using a risk-adjusted performance measure. Our results also show that noninterest income activities do not adversely affect BHC performance during the 2008 financial crisis, and in some cases, they even improve performance. Our findings help inform policymakers regarding regulations permitting bank participation in noninterest income activities.

Macroprudential regulation and financial inclusion: Any difference between developed and developing countries?

In this study, we provide evidence of the negative influence of macroprudential regulation on financial inclusion. Our results suggest that in developing countries, macroprudential regulation leads to adverse effects on the use of banking services because some people are prevented from accessing the credit market. The results remain robust even when we change the measure of financial inclusion to indicators of mobile banking. In developed countries, however, the effect is complicated. Macroprudential regulation still decreases the use of banking services, but it also increases people’s access to banking services. This finding implies that banks might have responded to the regulations by expanding their geographic coverage or engaging in noninterest income activities.

Non-Interest Income and Deposit Money Banks (DMBs) Performance in Nigeria

The review of the regulations guiding the activities of DepositMoney Banks (DMBs) in Nigeria affected the revenue generated byDMBs, forcing most banks to diversify their sources of revenue tonon-interest income. Panel data technique was employed to examinethe impact of non-interest income on DMBs performance in Nigeriafrom 2012 through 2019. The empirical finding revealed that noninterestincome, capital adequacy ratio, and bank loan positivelyand significantly impact DMBs’ performance in Nigeria. The studyrecommends that DMBs delve into non-interest income activities as itappeared to improve the performance of DMBs in Nigeria, and themonetary authority should review the policy guiding the non-interestincome activities of the DMBs at regular intervals.How to Cite:Yunusa, L. A., Arikewuyo, K. A., Olowofela, E. O. & Sanyaolu, W. A. (2022). Non-Interest Income and Deposit Money Banks (DMBs) Performance in Nigeria. Signifikan: Jurnal Ilmu Ekonomi, 11(1), 31-42. https://doi.org/10.15408/sjie.v11i1.15469.

Do Non-Interest Income Activities Matter For Banking Sector Efficiency? A Net Interest Margin Perspective

Do Non-Interest Income Activities Matter For Banking Sector Efficiency? A Net Interest Margin Perspective

The impact of economic policy uncertainty on banks' non-interest income activities

This paper investigates how banks adjust their business model amid rising global economic uncertainty. Specifically, we analyze the effect of economic policy uncertainty (EPU) on banks' non-interest income activities, using a large panel dataset of 3913 banks operating in 9 countries over the period 2009–2018. We find no statistically significant effect of EPU on banks’ net non-interest income (NNII). Further analysis shows that the lack of impact on NNII is due to a reduction in gross non-interest income which was offset by a decrease in gross non-interest expenses. Our results also suggest that the likelihood of banks to diversify income amid high EPU is conditional on the negative interest rate environment.

The implication of banking regulation on bank business model: evidence from the ASEAN countries

Purpose The purpose of this paper is to examine to what extent is the impact of Basel II adoption on bank business models in the emerging market of selected ASEAN member states. Design/methodology/approach To evaluate the impact of the Basel II regulation on banking business models, a difference-in-differences estimation approach is used. This study defines bank business models using diversification index of a modified Herfindahl–Hirschman Index. Findings The findings suggest that the Basel II framework only affects banks’ income diversification, while there is no evidence that it leads to funding and asset diversification. Under the Basel II accord, banks have adjusted their business models by diversifying their sources of income to avoid the obligation for keeping more capital; in contrast, a less developed financial market structure and a dependency on customer deposits are creating difficulties for banks in diversifying their funding and asset structure. Research limitations/implications The banking sample are taken only from ASEAN countries. Practical implications The findings provide important implication on the regulatory perspective, which is the implementation of Basel II framework induces higher intensity for the use of non-interest income activities. Including in these activities are trading and derivatives. Accordingly, the financial authorities should take with care the use of trading and derivatives products in the banking industry which is already embedded in current Basel framework, the Basel III Accord. Originality/value The paper provides direct evidence on the impact of Basel II on bank business models in the emerging markets of ASEAN banking sectors.

Non-interest Income, Credit Risk and Bank Stability: Evidence from Vietnam

This study examines the impact of non-interest income on bank riskiness captured by two dimensions of credit risk and bank stability. Based on a panel of Vietnamese banks during the period 2007–2017 and a dynamic approach estimated by the generalised method of moments (GMM), we find that: (1) banks more involved in non-interest income activities have less credit risk, but higher bank instability; (2) the decomposition of bank instability indicates that risk-adjusted profitability and capital buffer corresponding to risk-taking are adversely affected by non-interest income; and (3) private banks could gain more diversification benefits of credit risk reduction, while the drawback effect of income diversification on bank stability is lower for state-owned banks. Our findings exhibit the double-edged nature of the shift toward non-interest from interest income, but we have no evidence to support the notion that non-interest income drives bank stability through the transmission impact of credit risk. The study clarifies the ongoing debates about the safety and soundness of income diversification in emerging markets.

How does economic policy uncertainty affect bank business models?

Investigating the impact of economic policy uncertainty (EPU) on banks’ business activities using a large sample of U.S. banks during 2000–2017, we find that banks are more likely to diversify their income stream into new activities generating non-interest income amid high EPU. The results indicate that EPU on CPI and bank M&A has no impact on banks’ decisions about non-interest income activities (NIIA) and, notably, small and medium banks increase their NIIA when EPU is elevated, whereas large banks do not. Importantly, EPU related to government spending has the highest impact on banks’ business activities, followed by news-based EPU.

Discerning the impact of disaggregated non-interest income activities on bank risk and profits in the post-Gramm-Leach-Bliley Act era

In the aftermath of the global financial crisis, many analysts have pointed towards the Gramm-Leach-Bliley Act and the associated regulatory changes in the banking industry as one of the key reasons for the financial meltdown in the US. Using an extensive dataset of all 5491 US commercial banks that were operational from June 2001 to March 2016, we examine the impact of aggregate non-interest income and its eleven disaggregated categories on bank-specific risks and profits. We find unequivocal evidence that both aggregate non-interest income and its different constituent categories increase bank risks, which is more pronounced in the post-crisis period. The results for bank profits are more mixed. The results call for a need to improve regulation and supervision of various disaggregated non-interest income activities such that the costs of engaging in these activities do not exceed their benefits for banks.

The structure and behaviour of small African banks: market power and bank diversification strategy in Ghana

This paper analyses the effect of market structure on diversification strategies of the banking industry of Ghana - a growing medium-sized Sub Saharan African country. We draw on a comprehensive panel dataset of 21 Ghanaian banks over a ten-year period. Based on HHI measures of diversification, there is evidence of a gradual shift away from concentration in interest income streams to non-interest income generating activities. The trend in the Lerner index of market power shows that there is very little competition amongst Ghanaian banks. We employ standard panel data econometrics to test if market power influences bank diversification and find that diversification within non-interest income activities increase as banks gain market power.

Activity Strategies, Agency Problems and Bank Risk

Our results show that US banks with a relatively high share of non-interest income become riskier with a moving toward non-interest-generating activities, especially activities from investment banking, proprietary trading, etc. The findings also prove, although weakly, that banks with a relatively low share of non-interest income enjoy the net gains from an increase of non-interest income activities. Interestingly, the data provides evidence of the bright side of diversification during crises. Our main findings are robust with a battery of robustness tests. The results are partially explained under agency frameworks related to poor corporate governance. Finally, the evidence has different implications for regulators, managers and investors.

On the Riskiness of Bank: A Two-Sided Story of Activity Strategies

Our results show that US banks with relatively high share of non-interest income become riskier with a moving toward non-interest-generating activities. The findings also show, although weakly, that banks with relatively low share of non-interest income enjoy the net gains from an increase of non-interest income activities. Interestingly, the data provides evidence to the bright side of diversification during the crises. Our main findings are robust with a battery of robustness tests. This study also yields an insight into why banks diversify under agency problems framework. Finally, the evidence has different implications for regulators, managers and investors.

Asset quality, non-interest income, and bank profitability: Evidence from Indian banks

This paper investigates whether a shift toward non-interest income activities improves the profitability of Indian banks and, if so, how it varies across ownership groups and banks with different asset qualities. Our findings show that higher share of non-interest income yields higher profits and risk-adjusted profits; in particular when banks are involved in more trading activities. The results indicate that private foreign banks earn more risk-adjusted profits compared to public sector and private domestic banks. Furthermore, we also find that income diversification benefits more to the banks that have lower asset quality compared to the banks that have higher asset quality. The findings are insensitive to dynamic panel data estimations and alternative sample specification. The results of this paper provide valuable insights for policymakers, and conclude that ensuring diversification activities enhances bank profitability, in particular for the banks that have lower asset quality.

Income Diversification and Bank Risk-Return Trade-Off: Evidence from an Emerging Economy

This study examines the impact of bank income source diversification on risk-return trade off, of commercial banks in an emerging economy. Considering eleven commercial banks for the period from 2002 to 2015, the paper examines non-interest income and its components against the risk-adjusted returns to explore the relationships among them. Results confirmed that non-interest income is riskier than interest income, but offers potential diversification benefits to shareholders. This is followed by the negative correlation between the interest income and non-interest income. Moreover, risk adjusted return on equity is positively affected by higher non-interest income activities, indicating that a marginal increase in non-interest income improves the shareholders? risk return trade off. However, interest income, which has a significant negative relationship with risk-adjusted return on equity indicate that increase in interest income has been associated with worsening the risk return tradeoff for shareholders. Further, comparative analysis of non-interest income and risk-adjusted returns shows that foreign exchange income and other income categories have major influence on the shareholders risk and return. However, fee based income has no explanatory power over risk adjusted return. The findings of the study have important policy implications on the regulators in the implementation of capital adequacy requirements which adjust with the bank?s risk exposure.

The Effect of Income Diversification on Bank Risk: Evidence from Vietnam

This study examines the effect of income diversification on bank risk in Vietnam over the period of 2006 to 2014. Our findings suggest that commercial banks that have shifted to non-interest income activities tend to face greater risk. This somewhat conflicts what has been suggested by diversification strategy in terms of risk reduction. Our results demonstrate that Vietnamese banks should focus on traditional lending activities, especially for small banks in Vietnam, given that diversification may add more risk for individual banks and banking system as a whole.

REVENUE DIVERSIFICATION, PERFORMANCE, AND BANK RISK: EVIDENCE FROM INDONESIA

<p>This paper examines the effect of revenue diversification on bank performance and bank risk by studying 101 conventional commercial banks in Indonesia over the period of 2010-2014 resulting in 505 observations. By employing panel least square technique, our results show that revenue diversification negatively affects bank performance. Moreover, it is found that diversified banks are riskier than specialized banks. The risk is diminished when state-owned banks diversify their business. Joint venture banks are riskier than other banks when they engage in non-interest income activities.</p>

Bank risk shifting and diversification in an emerging market

This paper investigates risk shifting in commercial banks in the emerging market of Vietnam, where banks fund domestic asset portfolios almost exclusively from deposits and with limited issuance of securities. We investigate the relationship between these banks’ income diversification strategies and their overall level of risk during the recent period of deregulation and global financial crisis. Our results show that those commercial banks that have shifted to non-interest income activities in fact face higher levels of risk. This finding is at odds with theories that argue that diversification is a strategy for risk reduction and has broader implications for domestic system stability. The analysis provides a framework for evaluating these issues in other emerging markets.

Performance of Non-African Foreign Commercial Banks in Uganda

The focus of this study was to establish key factors responsible for the performance of non-African foreign Commercial banks in Uganda, in the light of Global Advantage Theory. The analysis was supplemented by structure–conduct performance (SCP) and efficiency hypothesizes (ES).The study analysed the performance of licensed non-African foreign commercial banks on average, over the period 2000-2011, using Linear multiple regression analysis. The study findings showed that, management efficiency, capital adequacy and reputation/goodwill are key factors affecting the performance of non-African foreign commercial banks in Uganda. On the contrary, credit risk has a negative impact on performance of non-African foreign commercial banks in Uganda. On a positive note, diversification, investment in securities and correct prediction of inflation are factors that drive the enhanced performance of non-African foreign commercial banks in Uganda. The emerging policy implication is that commercial banks’ managements should focus on improving: management efficiency; bank reputation/goodwill; credit risk management; capital adequacy levels; diversification and investment. In addition, monetary policy regulations and instruments should not enforce high liquidity and capital adequacy levels. There is also need for regulations on non-interest income activities to harmonize the impact of diversification on all commercial banks’ performance and avoid the exploitation of commercial banks’ customers.

Non-interest Income, Trading, and Bank Risk

This study examines the interaction of bank risk and non-interest income (trading and non-trading) controlling for the executive incentive compensation effect. We do not find executive stock option compensation (ESO) directly impacts bank risk. On the contrary, bank non-interest income, both trading and non-trading revenue components, positively and significantly affects bank risk. This result is robust to the difference-in-difference regressions, bank fixed effect, and the exclusion of too-big-to-fail banks. In a simultaneous equations setting, non-interest income activities affect bank risk of all types, while ESO does not. Moreover, idiosyncratic risk has a positive effect on bank non-interest income activities, but systematic risk has no effect. This result suggests that executives of banks with high idiosyncratic risk have more incentive to expand into the territory of non-interest income activities. Since high-risk banks pose more concern to investors and regulators, we further examine bank risk by means of quantile regressions which dissect the behavior of banks at the tail risk distribution. The findings point out that banks’ decision to diversify into non-traditional business lines is associated with risks in high-risk banks. The impact of non-interest income/trading revenues on bank risk increases in risk, and often the largest impact is spotted for banks with extreme risks. This implies that the leverage effect of non-interest income/trading activities is larger in high-risk banks.