• Income and Loan Perspectives: Do Taiwan Banks Benefit from Diversification?

Abstract

This study constructs the dimensions of bank diversification in terms of loan portfolios and income sources. First of all, we examine the impacts of bank diversification on bank profitability and risk. Furthermore, we investigate the impact of bank diversification on profitability and risk based on the bank size and the economic growth. This paper focuses on 41 Taiwan domestic banks from 1997 to 2009. This study employs 462 observations to conduct the empirical analysis. The results show that noninterest income ratio is negatively related to net interest margin. Furthermore, loan portfolio diversification can effectively reduce the nonperforming loan ratio. These results are consistent with the traditional portfolio theory. However, to non-FHC banks and smaller banks, diversification in loan portfolios has significantly negative effect on risk adjusted return on assets. In terms of the bank profitability to the income diversification, large banks earn higher return on equities. However, the bank size has no significant effect on risk adjusted return on equities. Diversifciation in loan portfolio or income sources reduces the level of non-performing loans. Therefore, diversified banks can create the benefit of scope economics when the bank size becomes larger. Bank profitability, risk adjusted returns, and the nonperforming loan ratio benefit under slumping economic growth because of the diversification on loans and revenues. Therefore, the benefits of bank diversification are easily observed when economic growth slows. Diversified banks are able to maintain or even improve their profitability during the economic downturn. However, it might not be the situation during the financial crisis.

Keywords: Diversification、Bank Performance、Adjusted Bank Performance、

Commercial Banks