Employing a panel data set including 37 joint-stock commercial banks covering the period from 2006 to 2013, this paper investigates the impact of income diversification on bank risk and returns. Our results show that increased income diversification results in higher rates of bank returns. | Vo Xuan Vinh & Tran Thi Phuong Mai / Journal of Economic Development 23(2) 61-76 61 Profitability and Risk in Relation to Income Diversification of Vietnamese Commercial Banking System VO XUAN VINH University of Economics HCMC – vinhvx@ TRAN THI PHUONG MAI Asia Commercial Bank – phuongmai93nt@ ARTICLE INFO ABSTRACT Article history: Employing a panel data set including 37 joint-stock commercial banks covering the period from 2006 to 2013, this paper investigates the impact of income diversification on bank risk and returns. Our results show that increased income diversification results in higher rates of bank returns. However, when risk is considered, the increased income diversification leads to lower risk-adjusted returns. Empirical evidence also shows that the income diversification is not beneficial to joint-stock commercial banks in Vietnam. Received: Jan. 27 2015 Received in revised form: Aug. 20 2015 Accepted: Mar. 25 2016 Keywords: Income diversification, bank, returns, risk. 62 Vo Xuan Vinh & Tran Thi Phuong Mai / Journal of Economic Development 23(2) 61-76 1. Introduction Since the early 2000s commercial banks in the world tend to diversify their activities, caused by competitive pressures or the profits from financial investment (DeYoung & Roland, 2001). In Vietnam, due to a considerable increase in the number of commercial banks, there has been increasingly fierce competition between these banks, starting from 2006. In addition, the Vietnamese commercial banks have to perform against foreign ones, and the competition tends to be more intense when 100% foreign ownership is allowed in the national banking system. Furthermore, financial firms, with their significantly increasing number and size, in recent times have been connected to harsher competitiveness, which causes marginal revenue from traditional credit operations to have increasingly been shrinking. The years of 2006–2007 saw a boom in stock market operations, and .
