Bank Diversification & the Systematic Risk of Equity Portfolio

2016

The paper aims at identifying the potentials of decreasing the systematic risks of banking equity portfolio through changes in the diversification nature of banks activities. We analyzed the financial statements of (13) Jordanian banks on parallelism with market index of Amman stock exchange (ASE) for the period (2006-2012). We used Herfindahl Hirschmann index (HHI) to measure the diversification degree of revenue, credit, and deposits activities.The study concluded that (a) stock market has evaluated the changes in revenue diversification more efficiently than changes in the structure of credit or deposits regarding the systematic risks of bank equity portfolio.(b) The concentration of interest income in the bank’s revenue portfolio was high and was positively correlated with changes in the systematic risks of trading. (c) The Jordanian banks were more diversified regarding credit and deposit activities, but this diversification was not evaluated by market. And finally, the study s...

International Journal of Monetary Economics and Finance, 2010

In this paper, we carry out an empirical study for the Tunisian market to shed light on the question whether the observed shift into non-interest income activities improves performance of commercial banks. Our main results can be summarised in three statements: • banks diversified across both interest and non-interest income generating activities have higher levels of raw share returns than those focusing their activities • focusing into non-interest generating activities decreases market profitability of banks • banks that are functionally diversified also experience higher relative levels of systematic risk while the effect on the idiosyncratic risk component is non-significant.

2016

The effect of banks’ credit portfolio diversification on return on asset, return on equity and credit risk is investigated in this study. The sample is comprised of seven banks listed in Tehran Stock Exchange (TSE) whose data has been accessible between the years 2009 and 2014. According to the type of data and analysis methods, panel data multivariate regression method was used in this study. Results show that there is a significant relationship between credit portfolio diversification and risk; furthermore, it is the size that influences return on equity (ROE) and return on asset (ROA) of banks and in fact, there is no statistically significant relationship between use of diversification strategy in banks’ credit portfolio and their ROA and ROE.

Folia Oeconomica Stetinensia

Research background: Motivation for this study is the rapid development of conglomerate banking stimulated by the synergy between the traditional and parallel investment activity of banks before the 2007–2008 financial crisis. Existing studies do not answer the question about the positive influence of diversification on bank stability. They state that the combination of lending and non-interest income allows benefits to be derived from risk diversification. However, on the other hand they emphasise that non-interest and interest incomes are strongly correlated, which does not bring positive effects from diversification. Purpose: Scientific problem aimed to be solved is to verify how the diversification of activities in commercial banks into non-interest products (i.e. trading, securities-based investment activities, and derivatives) brings positive effects such as income stabilization and risk reduction. We examine the implications of banks’ risk adjusted ROA that manifest themselve...

Procedia Economics and Finance , 2015

The effect of banks' credit portfolio diversification on return on asset, return on equity and credit risk is investigated in this study. The sample is comprised of seven banks listed in Tehran Stock Exchange (TSE) whose data has been accessible between the years 2009 and 2014. According to the type of data and analysis methods, panel data multivariate regression method was used in this study. Results show that there is a significant relationship between credit portfolio diversification and risk; furthermore, it is the size that influences return on equity (ROE) and return on asset (ROA) of banks and in fact, there is no statistically significant relationship between use of div

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.

Journal of Financial Services Research, 2005

This paper analyzes performance and portfolio choice of banks' investments across business units using methodologies developed mainly for equity investments. The backgrounds to the paper are major recent developments in the financial services industry, mainly consolidation in the banking industry that raised the issue of efficiency gains due to diversification. The paper focuses on banks in Israel as an extended case study, using the fact that Israeli banks have operated as (limited) universal banks for a long time. The results suggest that there are gains to diversification and that risk adjusted performance is mostly consistent with optimal portfolio choice. Most of the previous research in this area has been done in the US. These studies necessarily focused on hypothetical combinations of different business activities because of the legal limits on US banks. Thus, this paper adds to the literature both by examining actual combinations and looking at another country.

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.

Pressacademia

Purpose-The purpose of this paper is to examine Jordanian banks in terms of the impact of income diversification on their performance (profitability and net interest margin). Methodology-Based on the period 2009-2017 and all thirteen Jordanian commercial banks, the econometric models are estimated using the Seemingly Unrelated Regression (SUR). Bank performance is measured by return on assets and net interest margin. As far as banks' income diversification is concerned, we use a myriad of measures including net commission income to total assets, proportion of bank credit to individuals, SME sector, corporate sector to total credit, and the real estate sector. Findings-Based on the statistical analyses, we conclude that that income diversification impacts bank profitability in a positive manner. However, this impact (positive) comes only at the expense of widening net interest margins. Conclusion-It is in the interest of the banking system in Jordan to promote financial inclusion at the national level. Indeed, this aspect is important to, not only the concerned individuals, but also to their (banks) performance. Moreover, with greater levels of financial inclusion, net interest margin might also narrow.

Ankara Üniversitesi SBF Dergisi, 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.