Bank revenue diversification: its impact on risk and return in Brazilian banks

Abstract

The present study aims to determine the impact of bank revenue diversification on Brazilian banks’ risk and return. This strategy has been adopted by banks in several countries, including Brazil. In 2003, noninterest income accounted for 17.80% of the operating revenue of the banks analyzed, and in 2014, this share increased to 27.40%. While many studies have addressed the subject in American, European and Asian banks, it still has not been approached in a sample of Brazilian banks. Since the banking industry is a key variable for the financial system’s stability, it is important to study the factors that affect banks’ risk and return. We analyzed the sample for the period from 2003 to 2014, using dynamic panel data GMM (Generalized Method of Moments) to address endogeneity, heteroscedasticity and autocorrelation problems. Our main results show that noninterest income has a major role in the performance of the banks studied; our analysis of financial intermediation activities showed that loan operations produced better results than trading. Moreover, confirming the hypotheses proposed, noninterest income showed a generally positive impact on return and risk adjusted return for the banks studied. However, against our expectation, noninterest income showed a positive relationship with the risk of these banks (although not statistically significant). It is worth highlighting the control variables, i.e., real interest rate, GDP and bank growth, which were relevant in determining bank performance.

Financial health of Syariah and non-Syariah banks: a comparative analysis

“…These findings are in contrast with those of Čihák and Hesse (2010) but support the studies conducted by Lepetit et al (2008) and Rashid et al (2017). The findings of Ferreira et al (2018) state that banks with less non-lending based income sources are exposed to higher insolvency risk. Similarly, the profitability variable represented by RTPA and RTPE supports the hypothesis – positive and significant for both response variables.…”

Diversification, Relational Capital and Bank Performance: Evidence from Commercial Banks in China

“…Ferreira, Zanini and Alves (2019) employ 1,019 data from Brazilian commercial banks, investment banks, development banks and other banks from 2003 to 2014 by using panel data methods to analyze the impact of bank income diversification on risk and return. The empirical results show that bank noninterest income (NII) and income concentration (HHI) have a positive impact on business performance (ROA) [8].…”

A comparative analysis of capital, risk, efficiency, profitability, diversification and integration of the Eurozone and the United States banking institutions in the aftermath of the global financial crisis

“…Additionally, Moudud- Ul-Huq et al, (2019) employ data from Asian banks after the global financial crisis and convey that the revenue diversification is positively related to bank performance and bank stability, whereas the impact of asset diversification varies across the reported countries. However, Ferreira et al, (2018) assess a sample of Brazilian banks and find evidence that revenue diversification is directly connected with risk and positively, but insignificantly, connected with performance. Also, Lee et al, (2019) examine the effect of asset correlation on the relationship between income diversification and risk and their findings indicate that although the relationship is positive, it could be inverted because of asset correlation.…”

“…Over the past few decades, the highly competitive environment, the deregulation policies (for example, the Gramm-Leach-Bliley Act (GLBA) of 1999), the managerial innovations and technological progress have created incentives for banking institutions to diversify their activities (Kim et al, (2020)). Thus, banking institutions have increasingly become involved in non-traditional banking activities resulting in the significant increase of non-interest income 13 (Wu et al, (2020), Maudos, (2017, Demirgüç-Kuntand Huizinga, (2010), Ferreira et al, (2018)). By diversifying their activities, banking institutions attempted to sustain their profitability levels despite the changing conditions, but they were exposed to further risks (Luu et al, (2019)).…”

“…Secondly, the income diversification (DIVI) ratio is commonly employed (Moudud-Ul-Huq et al, (2019), Edirisuriya et al, (2015), Chen et al, (2018), Luu et al, (2019), Ferreira et al, (2018)). This measure breaks down the two major categories of income which are non-interest income and net interest income.…”