Diversification strategies, bank risk and performance: Empirical evidence from Vietnam

Abstract

This dissertation investigates the impacts of asset, funding, and income diversification strategies and their combinations on bank performance and risk in Vietnam, especially during the financial crisis. The research also evaluates the role of ownership structure upon diversification-risk and performance nexus. Panel data of 34 Vietnamese commercial banks from 2005 to 2019, with advanced modern econometrics techniques, including OLS, FEM, REM, and system GMM estimator method (Arellano & Bover, 1995), are employed to achieve the research objectives fragment. The data was manually extracted from the bank's financial statements, obtained from Bankscope. The empirical results indicate that, in general, diversification practices in banking sectors are effective in improving banks’ risk-return profile, especially during the financial crisis. However, using different strategies in combinations is only effective for income and funding diversifications. These findings are robust regarding the use of alternative measures of diversification. The results also indicate that the impact of diversification strategies on banks’ risk and performance varies across different types of bank ownership: State-owned banks, domestic private banks, and foreign banks. This dissertation fills the gap in empirical literature by systematically examining the nexus between diversification strategies, bank risk, and performance, conditioned upon financial crisis and ownership structure. In this sense, the findings of this dissertation provide bank managers and regulators with important information about the diversification strategy's effectiveness to maintain the stability of the banking system and financial market.