Diversification in Banking and its Effect on Banks' Performance: Evidence from Turkey 1 (original) (raw)
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2018
This paper empirically analyzes the effects of product (loan), sector and income diversification strategies on the performances and risks of Turkish commercial banks over the period 2005–2016, in which 2008-2009 treated as a crisis period. Profitability is measured by Return on Assets ratio and natural logarithm of Non-performing Loans is used as a proxy of risk. We evaluate the different dimensions of diversification and using the Entropy methodology to distinguish the total diversification into related and unrelated components. Diversification is captured in three broadly defined dimensions: incomes, products and sectors. Then, we associate all dimensions of diversification with bank profitability and risk measures, across banks and in years, via panel data analyses. In this way, the paper aims to provide recent evidence for Turkish banking sector’s diversification strategies and their outcomes. Our findings indicate that, to be especially dominant on the within groups, income and product (loan) diversification increase return on assets while decreasing loan losses; sectoral diversification decreases profits, but increases risk.
Bank diversification and performance in an emerging market
International Journal of Managerial Finance, 2019
Purpose The purpose of this paper is to investigate the impact of diversification on profitability, profit efficiency and financial stability of Ghanaian banks. Design/methodology/approach The authors employed a panel regression technique on a data set of 32 banks from 2000 to 2015. The data envelopment analysis is used to compute profit efficiency scores with credit risk accounted for. Findings The results suggest that income diversification decreases profit, profit efficiency and financial stability. The impact on profit and stability is U-shaped. The impact of asset diversification was found to be insignificant. High competition reduces both profitability and profit efficiency which is inconsistent with the quiet-life hypothesis of Hicks (1935), but financial stability increases with competition. High investment in tangible assets is associated with poor performance. Non-banking financial institutions that later became universal banks are not financially stable. Competition, size...
Revenue Diversification and Bank Performance: Evidence from Turkey
South-Eastern Europe Journal of Economics, 2020
Over the last three decades, the financial industry in developed as well as in deve-loping countries has experienced major changes. One of these changes is revenue diversification on banking sector. The main purpose of our study is to examine the effects of income diversification on bank performance. Scope of Research is taken as the sample deposit banks operating in Turkey. Using the data of 14 banks between 2010 and 2017, variables were analyzed with dynamic panel data. Because of Herfindahl-Hirschman Index (will be addressed as HHI fore after) widely used to measure diversification, we used HHI for analyzing the revenue diversification. In the model, the return on assets (ROA) was taken as the dependent variable representing the bank performance, and the criterion of revenue diver-sification was HHI (Harfindal Hirsman Index) as the independent variable and other control variables were added. The panel GMM tecnique was used because of its some features. According to the results; t...
Does asset diversification in banks reduce risk? Turkey case
Journal of Administrative and Business Studies
In this study, the relationship between balance sheet items in terms of credit risk and market risk is tried to be measured by panel data analysis. The banking sector is one of the leading sectors in a country's economy. The fact that banks are inancially sound ensures their sustainability on the one hand and a sustainable pro it level on the other. This study investigates whether the diversi ication of banks' asset items has a inancial impact on the risk level. In this context, panel data analysis was conducted by considering the data of the 15 largest banks operating in the Turkish Banking Sector for the period 2008-2017, and the relationship between banks' asset diversi ication and riskiness was investigated. While this relationship was found in some banks, it was observed that some banks did not. This study has outlined policy implications and opened up avenues for future research.
The Effect Of Revenue And Geographic Diversification On Bank Performance
2013
This paper investigates the effect of revenue and geographic diversification on bank performance, also on a risk adjusted basis. Using an unbalanced panel dataset of 3,002 observations relative to Italian banks for the period 2006-2011, the core question is to analyse the effect of geographic and functional diversification across and within both interest and non-interest income and their effect on some principal performance measures. Furthermore in our study we analyse whether certain type of institutions are better able to reap the benefits of diversification analysing performance implications for different categories of banks and if the results have been affected by the financial crisis. The main results suggest that revenue and geographical diversification play a role in determining bank performance. The relative effects appear, however, to be different between mutual and not-mutual banks suggesting different business strategies for different banks. Moreover, in the after crisis ...
SSRN Electronic Journal, 2000
Conventional wisdom in banking argues that diversification tends to reduce bank risk and improve performance, but the recent financial crisis suggests that aggressive diversification strategies may have resulted in increased risk taking and poor performance. This paper addresses this important question by evaluating the empirical relationship between diversification strategies and the risk-return tradeoff in banking. Our data set covers Russian banks during the 1999-2006 period and finds somewhat mixed results. Specifically, we find that banks' performance tends to be non-monotonically related to their diversification strategy. The marginal effects of focus indices (inverse measures of diversification) on performance are nonlinearly associated with the level of risk and foreign ownership. A focused strategy is found to be associated with increased profit and decreased risk only up to a certain threshold. Additionally, when foreign ownership is either very high or very low, banks tend to benefit more from being diversified. This analysis provides important strategic and policy implications for bank managers and regulators in Russia as well as in other emerging economies.
Commercial Bank Diversification and Financial Performance: The Moderating Role of Risk
Commercial banks in Kenya have posted good financial performance as indicated by ROA and ROE. This coincides with a period of enormous diversification occasioned by global financial sector liberalization, allowing banks to venture into a range of businesses while maintaining the traditional intermediation business. Theory and empirical evidence is equivocal on the financial performance impact of diversification. Often, theory provides an isolated analysis of the diversification – performance relationship which limits their generalizations especially in the face of systemic financial risks and crisis. Using an ex post facto explanatory design we investigate whether bank diversification affects financial performance and whether this effect is moderated by solvency and credit risk based on panel data from 34 commercial banks in Kenya over nine firm years. The authors find that income and asset diversification negatively and significantly affect commercial bank ROA while geographical diversification significantly – positively affect both ROA and ROE. We also find a significant positive moderation effect of credit risk on relationship between income diversification and ROA but a significant negative effect on relationship between asset diversification and geographical diversification with both ROA and ROE. On solvency risk, we find a significant positive moderation effect on relationship between geographical diversification and ROE.
Journal of Accounting, Business and Management (JABM)
This paper investigates the impact of geographic diversification onthe performance of Islamic banks. Using an unbalanced panel dataset of 54 Islamic banksimplemented in the GCC and Southeast Asia regions, during the 2004-2016 period,the core question is to analyze the effect of both diversification intra and beyond homecountries on Islamic banks credit risk, stability, and profitability. This research assertsthat geographical diversification within the home country seems to enhance Islamic bankstability, profitability but does not improve loan quality. More pronounced results arereported when banks expand intra and beyond the home country frontier. These findingsare consistent with the view that geographic expansion helps to strengthen stabilitythrough diversification of the specific region risk, but the related loan growth makes itmore difficult to assess and monitor credit risk. These findings have strategic implicationsfor bank managers, regulators, and supervisors about the cons...