Asset diversification, bank risk and return – the case of Vietnam

Abstract

Purpose – The purpose of this research is to investigate the diversification-bank risk & performance relations of commercial banks in Vietnam over the period 2002-2019. Diversification is measured in three dimensions – asset, income and funding. It also evaluates the impact of the recent financial crisis and ownership strategy on the above relationship. Methodology – Author uses dynamic panel data of 44 banks in Vietnam, with modern econometrics technique – GMM estimator method described by Arellano and Bover (1995), to achieve research objectives. The data was collected manually from bank annual financial statement, obtained from Bankscope. Findings – The empirical result shows that income and funding diversity positively impact bank performance whereas banks with diversified asset perform the worst. All types of diversification help banks to enjoy lower risk. However, during global financial crisis, income diversified banks bear more risk compare to funding diversity. In addition, author finds that the effect varies across different types of bank ownership, State-owned, foreign and listed banks. Contribution – This study fills the gap in empirical literature by systematically examining the nexus between diversification, bank risk and performance, conditioned upon ownership structure and financial crisis. In this sense, the findings of this study provide bank managers and regulators important inferences towards an appropriate business model to maintain the stability of the banking and financial market.