The Benefits of Revenue Diversification on Bank Profitability and Stability: An Empirical Study on Indonesian Commercial Banks
Abstract
Traditional business activities of commercial banks in Indonesia experienced a shift as indicated by the percentage of non- interest income per interest income from 26.1% in 2014 to 51.3% in 2020. The study aims to determine revenue diversification, internal determinants, and macroeconomic determinants in affecting profitability, stability, while also observing the role of bank capitalization. This study analyze sample of Conventional Commercial Banks in Indonesia from 2013 to 2020, using dynamic panel data GMM. Research proves that direct effect of non-interest income on revenue diversification has a significant positive effect on ROA and risk adjusted ROA, as well as a negative effect on NPL; as the indirect effect of only significantly affects RAROA. However, there are contradictions in the results of research using the interaction variable of revenue diversification with bank capitalization. The empirical test results also prove the role of the control variables cost income ratio, deposit to total asset, bank capital, loan to total asset, bank size, inflation rate, and GDP growth in affecting bank performance and stability. This study proves the specific benefit of revenue diversification for commercial banks in Indonesia as a whole, although it does not apply to BUKU 1 banks.
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References
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Ozili, Peterson K. 2018. Banking stability determinants in Africa. International Journal of Managerial Finance 14: 462-483.
Pennathur, Anita K., Vijaya Subrahmanyam, and Sharmila Vishwasrao. 2012. Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking and Finance 36: 2203-15.
Salas, Vicente, and Jesus Saurina. 2002. Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks. Journal of Financial Services Research 22: 203-224.
Sanya, Sarah, and Simon Wolfe. 2011. Can Banks in Emerging Economies Benefit from Revenue Diversification? Journal of Financial Services Research 40: 79-101.
Stiroh, Kevin J. 2004a. Diversification in banking: Is non-interest income the answer? Journal of Money, Credit and Banking 36: 853-82.
Stiroh, Kevin J. 2004b. Do community Banks benefit from revenue diversification? Journal of Financial Services Research 25: 135-60.
Stiroh, Kevin J. 2006. A portfolio view of banking with interest and noninterest activities. Journal of Money, Credit and Banking 38: 1351-62.
Stiroh, Kevin J., and Adrienne Rumble. 2006. The dark side of diversification: The case of US financial holding companies. Journal of Banking and Finance 30: 2131-61.
Sugiyono. 2010. Metode Penelitian Kuantitatif, Kualitatif, dan R&D. Alfabeta Jakarta
Wang, Chunyang, and Yongjia Lin. 2021. Income diversification and bank risk in Asia Pacific. North American Journal of Economics and Finance 57: 101448.
Wu, Ji, Limei Chen, Minghua Chen, and Bang Nam Jeon. 2020. Diversification, efficiency and risk of banks: Evidence from emerging economies. Emerging Markets Review 45 : 100720.
Yusgiantoro, Inka, Wahyoe Soedarmono, Amine Tarazi. 2019. Bank consolidation and financial stability in Indonesia. International Economics https://doi.org/10.1016/j.inteco.2019.06.002
Ahamed, M. Mostak. 2017. Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modelling 63: 1-14.
Alshubiri, Faris Nasif. 2017. Determinants of financial stability: an empirical study of commercial banks listed in Muscat Security Market. Journal of Business and Retail Management Research 11: 192-200.
Ashyari, Muhammad Zaki, and Rofikoh Rokhim. 2019. Revenue diversification and bank profitability: study on Indonesian banks. Jurnal Siasat Bisnis 24: 34-42.
Ben Jabra, Wiem, Zouheir Mighri, and Faysal Mansouri. 2017. Determinants of European bank risk during financial crisis. Cogent Economics & Finance 5: 1298420.
Berger, Allen N., and Robert DeYoung. 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21: 849-870.
Berger, Allen N., Iftekhar Hasan, and Mingming Zhou. 2010. The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking and Finance 34: 1417-35.
Boyd, John H, and Mark Getler. 1994. The role of large banks in the recent U.S. banking crisis. Quarterly Review-Federal Reserve Bank of Minneapolis 18: 2-21.
Brooks, C. 2014. Introductory Econometrics for Finance (3rd ed). New York: Cambridge University Press.
Chen, Hsiao-Jung, and Gusti AMB. Performance of Banks in Indonesia: The Importance of Banks Diversification and Corporate Governance. Review of Integrative Business and Economics Research 10: 91-104.
Chiorazzo, Vincenzo, Carlo Milani, and Francesca Salvini. 2008. Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research 33: 181-203.
De Jonghe, Olivier. 2010. Back to the basics in banking? A micro-analysis of banking system stability. Journal of Financial Intermediation 19: 387-417.
DeYoung, Robert, and Karin P. Roland. 2001. Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. Journal of Financial Intermediation 10: 54-84.
Doumpos, Michael, Chrysovalantis Gaganis, and Fotios Pasiouras. 2016. Bank diversification and overall financial strength: International evidence. Financial Markets, Institutions & Instruments 25: 124-169.
Elsas. Ralf, Andreas Hackethal, and Markus Holzhauser. 2010. The anatomy of bank diversification. Journal of Banking and Finance 34: 1274-87.
Ferreira, Jorge H.L, Fransisco A.M.Z, and Tiago W.A. 2018. Bank revenue diversification: its impact on risk and return in Brazilian banks. R. Cont. Fin 30: 91-106.
Ghosh, Amit. 2015. Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability 20: 93-104.
Hidayat, Wahyu Yuwana, Makoto Kakinak, and Hiroaki Miyamoto. 2012. Bank risk and non-interest income activities in Indonesian banking industry. Journal of Asian Economics 23: 335-43
Ismail, Aisha., Rafila Hanif, Sadaf Choudhary, and Nisar Ahmad. 2015. Income-diversification in banking sector of Pakistan: a ‘Blessing’ or ‘Curse’? The Journal of Commerce 7: 11-22.
Jensen, M., and Meckling W. 1976. Theory Of The Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics 3: 305-360.
Kim, Hakkon., Jonathan A. Batten, Doojin Ryu. 2020. Financial crisis, bank diversification, and financial stability: OECD countries. International Review of Economics and Finance 65: 94-104.
Kohler, M., 2014. Does non-interest income make banks more risky? Retail- versus investment-oriented banks. Rev. Finan. Econ 23: 82-193.
Lee, Chien-Chiang, Shih-Jui Yang, and Chi-Hung Chang. 2014. Non-interest income, profitability, and risk in banking industry: A cross-country analysis. North American Journal of Economics and Finance 27: 48-67.
Lepetit, Laetitia, Emmanuelle Nys, Philippe Rous, and Amine Tarazi. 2008. Bank Income Structure and Risk: An Empirical Analysis of European Banks. Journal of Banking and Finance 32: 1452-67.
Louzis, Dimitrios P, Angelos T. Vouldis, and Vasilios L. Metaxas. Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business, and consumer loan portfolios. Journal of Banking and Finance 36: 1012-27.
Markowitz, H. 1952. Portfolio Selection. The Journal of Finance 1: 77-91.
Martinez-Malvar, Marina, and Laura Baselga-Pascual. 2020. Bank Risk Determinants in Latin America. Risk 8 : 94.
Maudos, Joaquin. 2017. Income structure, profitability and risk in European banking sector: The impact of the crisis. Research in International Business and Finance 39: 85-101.
Mensah, Franklin Amuakwa, George Marbuah, and Dinah Ani-Asamoah Marbuah. Re-examining the Determinants of Non-Performing Loans in Ghana’s Banking Industry: Role of the 2007-2009 Financial Crisis. Journal of African Business 18: 357-379.
Mercieca, Steve, Klaus Schaeck, and Simon Wolfe. 2007. Small European banks: Benefit from diversification? Journal of Banking and Finance 31: 1975-98.
Meslier, Celine, Ruth Tacneng, and Amine Tarazi. 2014. Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions & Money 31 : 97-126.
Nguyen, My, Michael Skully, and Shrimal Perera. 2012. Market power, revenue diversification and bank stability: Evidence from selected South Asian countries. Journal of International Financial Markets, Institutions & Money 22 : 897-912.
Nisar , Shoaib, Ke Peng, Susheng Wang, and Badar Nadeem Ashraf. 2018. The Impact of Revenue Diversification on Bank Profitability and Stability: Empirical Evidence from South Asian Countries. International Journal of Financial Studies 6: 1-25.
Ozili, Peterson K. 2018. Banking stability determinants in Africa. International Journal of Managerial Finance 14: 462-483.
Pennathur, Anita K., Vijaya Subrahmanyam, and Sharmila Vishwasrao. 2012. Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking and Finance 36: 2203-15.
Salas, Vicente, and Jesus Saurina. 2002. Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks. Journal of Financial Services Research 22: 203-224.
Sanya, Sarah, and Simon Wolfe. 2011. Can Banks in Emerging Economies Benefit from Revenue Diversification? Journal of Financial Services Research 40: 79-101.
Stiroh, Kevin J. 2004a. Diversification in banking: Is non-interest income the answer? Journal of Money, Credit and Banking 36: 853-82.
Stiroh, Kevin J. 2004b. Do community Banks benefit from revenue diversification? Journal of Financial Services Research 25: 135-60.
Stiroh, Kevin J. 2006. A portfolio view of banking with interest and noninterest activities. Journal of Money, Credit and Banking 38: 1351-62.
Stiroh, Kevin J., and Adrienne Rumble. 2006. The dark side of diversification: The case of US financial holding companies. Journal of Banking and Finance 30: 2131-61.
Sugiyono. 2010. Metode Penelitian Kuantitatif, Kualitatif, dan R&D. Alfabeta Jakarta
Wang, Chunyang, and Yongjia Lin. 2021. Income diversification and bank risk in Asia Pacific. North American Journal of Economics and Finance 57: 101448.
Wu, Ji, Limei Chen, Minghua Chen, and Bang Nam Jeon. 2020. Diversification, efficiency and risk of banks: Evidence from emerging economies. Emerging Markets Review 45 : 100720.
Yusgiantoro, Inka, Wahyoe Soedarmono, Amine Tarazi. 2019. Bank consolidation and financial stability in Indonesia. International Economics https://doi.org/10.1016/j.inteco.2019.06.002
Published
2024-07-29
How to Cite
SETIADI, Robertus; DANARSARI, Dwi Nastiti.
The Benefits of Revenue Diversification on Bank Profitability and Stability: An Empirical Study on Indonesian Commercial Banks.
Journal of Accounting, Business and Management (JABM), [S.l.], v. 31, n. 1, p. 22-37, july 2024.
ISSN 2622-2167.
Available at: <https://journal.stie-mce.ac.id/index.php/jabminternational/article/view/979>. Date accessed: 27 nov. 2024.
doi: https://doi.org/10.31966/jabminternational.v31i1.979.
Section
Articles
