Non-interest Activities Research Articles

Threshold effect of non-interest income disaggregates on commercial banks’ financial performance in Zimbabwe

Financial performance has become a trending concept in corporate finance and strategic management in recent times especially in the aftermath of the Global Financial Crisis (GFC) of 2007–2009. As an antidote to charter value erosion caused by stiff competition from incumbents in traditional banking activities, banks venture into non-core banking activities as a diversification and survival strategy. The purpose of the study is to determine the optimal threshold levels of non-interest income that stimulate financial performance of ten Zimbabwean commercial banks using non-interest income disaggregates over 2009–2020. Unfortunately, studies that examine the non-interest-income-financial performance nexus of banks involved in intermediation are scant and inconclusive. Furthermore, the use of threshold models to crack this puzzle are conspicuous. The study employed Fully Modified Ordinary Least Squares and Threshold difference Generalized Methods of Moment nonlinear threshold approaches. The aggregated and disentangled non-interest income dynamic optimal thresholds found are 26 %, 17 % and 10 % whereas the average static ones are 35 %, 28 % and 17 %. Compared to aggregated non-interest income, the study reveals that the disaggregates pose a greater positive impact on financial performance of banks in the upper regime than their counterparts in the lower regime. In addition, more banks were found to be operating below the required minimum thresholds. To avert episodes of bank failures and hedging against banking sector fragility, commercial bank managers should come up with well-diversified portfolios of income-generating ventures. Also, central bank regulations must promote non-interest activities, competition, growth and reduce leverage of commercial banks.

The dark side of bank FinTech: Evidence from a transition economy

Using data from Chinese commercial banks from 2008 to 2018, this paper explores the effects of bank FinTech on stability (i.e., bank stability). We first construct and measure a bank Fintech index and then examine the relation between bank FinTech and stability. We argue that bank FinTech affects stability from two aspects: bright effects and dark effects. The results show that the dark effects prevail over bright effects, that is, bank FinTech decreases bank stability. Specifically, a one-standard-deviation increase in bank FinTech is associated with a 14.2 % reduction in bank stability. Our results also show that bank FinTech increases stability by improving risk control and increasing net interest margin (i.e., bright effects), whereas bank FinTech increases non-interest activities, and thus reduces stability (i.e., dark effects). Second, the negative impacts of bank Fintech on stability are weaker in state-owned banks. Third, as time progresses, the negative effects of bank Fintech become weaker. Finally, when we examine five subareas of bank FinTech, we find that artificial intelligence technology and big data technology increase bank stability, but internet technology reduces bank stability. Our main results pass a series of robustness tests and endogeneity issues.

Impacts of COVID-19 on Vietnamese Bank Performance: The Role of Bank Diversification

Although the COVID-19 pandemic has been undisputedly found to exert negative impacts on bank performance in general and their traditional lending activities specifically, the strategy of banks to deal with such a problem is still an open question. Our study attempts to answer this question through an empirical analysis of the impacts of COVID-19 on bank performance and the role of bank diversification. Specifically, data of all listed commercial banks in Vietnam over the period from 2015 to 2021 are estimated by the two-step system GMM models. COVID-19 is confirmed to have negative impacts on bank profitability. Bank diversification is found to increase bank profitability over the entire study period. Additionally, the study contributes to the extant literature by offering evidence that bank diversification has helped preserve bank profitability during COVID-19. It is suggested that to deal with the worsened traditional lending activities, diversification towards non-interest activities is an effective strategy for banks to improve their performance.

Does the Audit Committee Moderate the Effects of non-interest Activities on Bank Risks in China?

ABSTRACT Using Chinese data from 2000 to 2019, we investigate whether the audit committee moderates the effects of non-interest activities on bank risks. Three main results emerge. First, insolvency risk, portfolio risk, leverage risk, and return on assets (ROA) volatility increase if banks increase their non-interest income share. Second, the negative effects of non-interest activities on bank risks are weaker in banks with more financial expertise or longer board tenure of audit committee members. Channel tests show that the audit committee mitigates the risks from non-interest activities by increasing bank supervision. Finally, when we divide non-interest activities into trading activities and commission and fee activities, the results show that more financial expertise or longer board tenure for audit committee members mainly weaken the negative effects of trading activities on bank risks.

The effect of COVID-19 on revenue diversification, profitability and risk of banks in Zambia

The aim of this study was to evaluate the effect of the COVID-19 pandemic on revenue diversification and performance of banks in Zambia. The study was quantitative in design. Herfindahl Hirschmann Index measures for each bank to account for diversification between interest and non-interest activities were constructed, while the Risk Adjusted Return on Average Assets to measure bank profitability and the Z-Score to measure bank income volatility were computed. SPSS’s One-way repeated measures ANOVA was then used to analyse panel data from 16 of the 18 commercial banks in the country. The study concluded that there was no statistically significant difference in bank revenue diversification following the outbreak of COVID-19 in Zambia. With respect to bank performance, the study found that there was a statistically significant increase in bank profitability as measured by RAROAA in the aftermath of the pandemic. Similarly, the study found that there was a statistically significant increase in bank income volatility following the COVID-19 pandemic. Although bank profitability increased in the pandemic era, income volatility also increased thereby, exposing banks in the country to insolvency risk. The policy implication is that the Bank of Zambia should encourage banks to diversify their non-interest income sources to enhance their capacity to withstand major disruptions caused by natural and man-made disasters.

Helping or hampering banks competition? The Asian experience after the Asian financial crisis

In this paper we revisit the question of the determinants of competition in banking markets and provide a new, in-depth analysis. We use the successful stabilization experience that followed the Asian Financial Crisis and evaluate the effects of a comprehensive set of potential competition determinants on a sample of nine Asian countries observed in the period 2000–2016. Focusing on the loans market we estimate two separate models of competition: a more flexible reformulation of Bolt and Humphrey’s competition efficiency, and a dynamic Lerner index model. Our results are consistent between the two models. Competition overall increases moderately, despite the more prudential policies adopted after the crisis. Lower entry barriers, higher foreign penetration, foreign ownership and competition from the stock market, as well as higher concentration and larger size, all encourage competition among banks. Higher freedom on non-traditional banking markets instead promotes substitution and reduces competition for loans, as banks shift their competitive efforts towards potentially more profitable non-interest activities. These findings lend some support to the current restructuring policies in the region, and to the concomitant liberalization processes that have continued to take place.

Loan portfolio diversification and bank returns: Do business models and market power matter?

The paper examines how loan portfolio diversification drives bank returns, mainly focusing on the conditioning roles of business models and market power in this nexus. We employ a sample of Vietnamese commercial banks from 2008 to 2019 to perform regressions in the dynamic panel models with the two-step system generalized method of moments (GMM) estimator. We find that increased sectoral loan portfolio diversification reduces bank returns, but not all banks are equally affected. Banks that adopted a business model towards non-interest activities are hurt less from loan portfolio diversification, and bank market power may mitigate the detrimental effects of loan portfolio diversification on bank returns. When such asymmetric effects are sizeable, neglecting them could miscalculate the choice of loan portfolio diversification. Our findings are robust to a rich set of bank return indicators and alternative loan portfolio diversification measures based on the Herfindahl-Hirschman (HHI)/Shannon Entropy (SE) indexes with different sectoral exposure profiles. Thus, both regulators and commercial banks should take the disadvantage of portfolio diversification into account when encouraging/pursuing a diversified strategy, which must be accompanied by the crucial caveat that the damage is most pronounced for banks with lower shares of non-interest income and less market power.

INTERNET FINANCE, NET INTEREST MARGIN AND NONINTEREST ACTIVITIES IN CHINA’S BANKING SECTOR

Using data from 133 Chinese commercial banks from 2003 to 2015, we examine the links among Internet finance, net interest margin and noninterest activities. Four main findings emerge. First, the net interest margin exerts significantly negative impacts on the noninterest activities through incentive distortion, cross-subsidization and resource restriction effects. The incentive distortion effect plays a stronger role, while the cross-subsidization and resource restriction effects play weaker roles. Second, Internet finance significantly promotes the development of noninterest activities, meaning that the technology spillover effect of Internet finance is stronger than the customer loss effect in China. Third, Internet finance strengthens the negative effects of the net interest margin on fee and commission activities but weakens the negative effects of the net interest margin on other noninterest activities. Finally, we find that the effects of the net interest margin on noninterest activities are stronger in state-owned banks than in non-state-owned banks, while the effects of Internet finance on noninterest activities are weaker in state-owned banks.

Foreign Strategic Investors, State Ownership, and Non-interest Activities: Evidence from China

This paper contributes to the literature on foreign strategic investors (FSIs) by examining the influence of FSIs on non-interest activities. Using data from China’s banks for 2001–2016, we find that FSI entry is associated with significantly increased non-interest activities, especially commission and fee activities, of Chinese banks. Furthermore, local banks with directors appointed by FSIs have increased non-interest activities. Moreover, in state-owned banks, the effects of FSIs and directors assigned by FSIs on non-interest activities are both weaker. We also find that non-interest activities have not significantly changed after the exit of FSIs. These empirical findings will be informative and relevant to both policymakers and practitioners.

The interrelationship between net interest margin and non-interest income: evidence from Vietnam

PurposeThe purpose of this paper is to investigate the interrelationship between non-interest income (NII) and net interest margin (NIM) in the Vietnamese banking system between 2006 and 2015. Thereafter, the impact of NII on risk-adjusted returns is also examined.Design/methodology/approachVarious analysis techniques are used to achieve the research objectives.FindingsThe findings show a negative two-way link between NII and NIM, thus supporting the subsidisation hypothesis. Furthermore, NII 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 NII on risk-adjusted returns still holds in the first subsample (2006-2011). The coefficient of NII becomes positive but not significant for the subsequent period (2012-2015). In addition, the Spearman rank-order correlations of returns on assets and NII for both sub-samples are negative. Together, the author concludes that there are no diversification benefits in the Vietnamese banking system.Practical implicationsThe evidence suggests a trade-off between non-interest activities and traditional lending ones. In addition, the findings demonstrate that the Vietnamese banks may use NIIs to expand leverage and herd by coordinating NII strategy during the economic downturns. Thus, the banking system may be exposed to a greater risk. The research has implications for bank supervisors, policy-makers and bank managers.Originality/valueThis study is the first attempt to investigate the interrelationships between net NII and NIM in the Vietnamese banking system.

What drives bank efficiency? The interaction of bank income diversification and ownership

This paper examines the relation between income diversification and bank efficiency across 83 countries over the period 2003–2012. We also evaluate how ownership structure affects the impact of bank diversification on cost efficiency. Using a stochastic frontier approach to estimate bank cost efficiency, we find evidence that increased diversification tends to improve bank efficiency but the benefits of diversification are offset by the increased exposure to volatile non-interest activities. With respect to the impact of ownership, we find that state-owned banks with fewer volatile income sources are likely to be less efficient in terms of income diversification. Our results also reveal that more diversified foreign-owned banks tend to be less efficient in developed countries, while the increased foreign ownership of banks appears to improve the diversification benefits in developing countries after the financial crisis. Our findings highlight the implications of bank income diversification and ownership for efficiency and are relevant to bank regulators who are considering additional regulations on bank management.

Income diversification, bank stability and owners identity: international evidence from emerging economies

This paper examines how ownership structure affects the relationship between income diversification and bank stability in emerging markets. Examining data on more than 171 banks from 13 Middle East and North Africa countries examined over the 2006-2012 period, the impact of foreign and state ownership on income diversification and bank stability is jointly studied by a 3SLS model. The main finding is that diversification, across interest and non-interest activities and non-traditional banking activities, increases bank stability. State-owned banks seem to take more risk by diversifying less their income. Inversely, foreign ownership decreases risk by diversifying their income. The findings have significant strategic implications for bank managers, regulators and investors who share a common interest in boosting bank stability.

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

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.

CEO option compensation and systemic risk in the banking industry

We document that CEO risk-taking incentives induced by stock option compensation increase a bank’s contribution to systemic distress risk and systemic crash risk through reacting to common risk exposure of the banking industry. We also find that this relation operates through channels of engagement in non-interest income-generating activities and maturity mismatch associated with short-term debt financing. Further analysis reveals that CEO option-based risk-taking incentives increase investments in innovative financial products that form naturally interconnected networks, which increase systemic risk. Finally, we show that market illiquidity and financial crisis accentuate the relation between CEO risk-taking incentives and systemic risk.

The effect of foreign management and board membership on the performance of foreign acquired Turkish banks

Purpose– The purpose of this paper is to explore the effects of appointing foreign directors on the foreign acquired Turkish banks. Based on the developments in the Turkish banking system and the distinctive features of the Turkish market, the authors examine the appointment of foreign directors in three different levels: as a CEO, chairman and board member. The authors analyse how the appointments of foreign directors in each of these three levels affects the profitability and strategies of foreign acquired banks.Design/methodology/approach– The authors use the difference-in-difference (DID) model where the authors compare two groups: foreign acquired banks vs domestic banks for a five-year period. By applying the DID model, the authors aim to remove the time invariant individual characteristics of the banks that could be due to the permanent differences between the two groups, as well as biases from comparisons over time that could be due to trends.Findings– The authors find that the presence of the foreign chairman has a positive effect on the profitability of the foreign acquired bank and on the improvement of the income generated from interest activities, indicating that foreign chairman improves the monitoring of board of directors and brings new skills and experiences. Furthermore, foreign acquired banks are associated with an increase in the income generated from non-interest activities in the fifth year following their acquisitions, showing the introduction of new strategies. The change of the foreign acquired bank’s strategies in the fifth year after acquisition also suggests that it takes time to implement new strategies in a new environment.Originality/value– Though the effects of foreign board membership on bank’s performance have been previously discussed in literature, this study differentiates in that it distinguishes among different positions, e.g. chairman or CEO when examining the effect of a foreign director on a foreign acquired bank’s performance. In addition, the use of foreign acquired Turkish banks in the sample in this context adds to the general academic literature.

How Do Noninterest Income Activities Affect Bank Holding Company Performance?

We investigate whether noninterest income activities (both traditional and non-traditional), are associated with bank performance measures. We present evidence consistent with the theory that there is synergy between interest and noninterest income that improves performance. A decomposition of the main performance measure (ROA) into cost and revenue ratios reveals that the enhanced performance associated with noninterest income arises through both revenue and cost efficiency. In addition to ROA, we also use a risk adjusted performance measure and find consistent results. Our results also show that during the recent financial crisis, noninterest activities do not adversely affect BHC performance, and in some cases they even improve performance. We further address issues of the persistence of ROA and endogeneity by using a dynamic panel data approach, and our results remain consistent.

Determinants of bank performance: evidence for Latin America

PurposeThe purpose of this paper is to analyze the impact of macroeconomic‐industrial and bank‐specific factors on Latin American banks’ performance.Design/methodology/approachUsing the data panel system estimator version of the generalized method of moments, the authors estimate the determinants of return on assets and interest margin for a sample of 78 commercial banks from Argentina, Brazil, Chile, Colombia, México, Paraguay, Peru, and Venezuela over the period from 1995 to 2010.FindingsOn the one hand, the results show that bank performance is positively related to both idiosyncratic factors, such as service diversification, size, capital ratio, and specialization degree, and to macroeconomic‐industrial factors such as economic growth, inflation, and bank concentration. On the other hand, the results show that bank performance is negatively related to credit risk, liquidity risk, and operational inefficiencies.Originality/valueThe authors provide new evidence from the Latin American bank industry and incorporate the effect of diversification through noninterest activities.

Why have bank interest margins been so high in Indonesia since the 1997/1998 financial crisis?

We investigate the determinants of net interest margins of Indonesian banks after the 1997/1998 financial crisis. Using data for 93 Indonesian banks over the 2001–2009 period, we estimate an econometric model using a pooled regression as well as static and dynamic panel regressions. Our results confirm that the structure of loan portfolios matters in the determination of interest margins. Operating costs, market power, risk aversion and liquidity risk have positive impacts on interest margins, while credit risk and cost to income ratio are negatively associated with margins. Our results also corroborate the loss leader hypothesis on cross-subsidization between traditional interest activities and non-interest activities. State-owned banks set higher interest margins than other banks, while margins are lower for large banks and for foreign banks.

What precludes the development of noninterest activities in Chinese commercial banks from the perspective of the price of interest activities?

Noninterest activities of Chinese commercial banks remain sluggish. This article examines the price of interest activities and noninterest activities of Chinese commercial banks over 2000–2010 based on OLS and 2SLS regression. We find that the price of interest activities has a significant negative effect on the noninterest activities. It appears that controlled interest rate is the main hindrance of the development of noninterest activities, and the result is consistent with ‘political’ view. We also find that among state-owned commercial banks and nonstate-owned ones, the relationships of interest activities and noninterest activities are differential. The link between the price of interest activities and noninterest activities in state-owned commercial banks is stronger than that in nonstate-owned commercial banks. That is the result of different government intervention degree.

Is bank income diversification beneficial? Evidence from an emerging economy

This paper examines the impact of bank revenue diversification on the performance of banks in an emerging economy. Using a unique dataset with detailed information on non-interest income, our findings show that, conversely to studies on Western economies, a shift toward non-interest activities increases bank profits and risk-adjusted profits particularly when banks are more involved in trading in government securities. Our results also indicate that foreign banks benefit more from such a shift than their domestic counterparts. Moreover, we account for the institutional and regulatory environment advocating loans to SMEs and find that higher involvement in non-interest activities is only beneficial for banks with low exposures to SMEs. Our findings have important policy implications in terms of achieving optimal diversification and lower risk exposure, which might conflict with policies aiming to promote SME lending.