Exploring the asymmetric effects of loan portfolio diversification on bank profitability

Japan Huynh and Van Dan Dang

The Journal of Economic Asymmetries, 2022, vol. 26, issue C

Abstract: The paper analyzes how the effects of loan portfolio diversification on bank profitability differ according to bank size and state ownership. Through data on Vietnamese banks during 2008–2019 and the dynamic panel model, we strongly confirm the average adverse impacts of sectoral loan portfolio diversification on bank profitability. Further analysis indicates that the drawback of loan portfolio diversification is mitigated for larger banks rather than smaller counterparts. Regarding the asymmetric effects induced by bank ownership, bank profits increase with loan portfolio diversification at state-owned banks, as opposed to the cost implication found for private banks. Additionally, the paper documents the nonlinear inverted U-shaped relationship between loan portfolio diversification and bank returns as a bank risk function. Concretely, increased bank risk could diminish the harmful effects of loan portfolio diversification on bank returns; when the level of risk is exceptionally high, these harmful effects may rise again.

Keywords: Bank size; Diversification; Loan portfolio; State ownership (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:26:y:2022:i:c:s1703494922000111

DOI: 10.1016/j.jeca.2022.e00250

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