Linking income diversification and profitability of selected universal banks in the Philippines

• Main Authors: Damasco, Mary Grace G., Ip, Michelle G., Irawa, Sarah Jane I., Ycasiano, Kristina Mae P.
• Format: text
• Language: English
• Published: Animo Repository 2010
• Subjects: Universal banks > Philippines; Banks and banking > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/18319
• Institution: De La Salle University

Allowing banks to engage in commission-based activities may make a change in the structure of their income sources more possible. In fact, banks' traditional role of making industrial and consumer loans becomes just as vital as their new job of levying service fees as evidenced by the increasing share of non-interest income among several banks. Hence, the researchers of this study consider the importance of identifying how income diversification contributes to a bank's risk-adjusted returns. The paper have investigated and examined whether income diversification and bank performance are positively or negatively correlated. Using Vicenzo Chiorazzo, Carlo Milano and Francesca Salvini's Income diversification and bank performance evidence from Italian banks as base article, the proponents have likewise pointed out the extent of the effect of diversification on bank profitability. Aside from the diversification factor (DIV) and non-interest income (NII), several other variables are also utilized. The data on bank assets (assets), real bank asset growth rate (growth), total equity (equity) total loans (loan) and non-performing loans (BAD) are required from the financial statements of selected universal banks. To determine the results, a panel regression is used. And such regression gives the following results: NII and equity are positive and statistically significant while LOAN and BAD are negative and statistically significant for SHROA NII is positive and statistically significant for SHROE. DIV remains insignificant for both SHROA and SHROE while assets is insignificant for SHROE. Consistent with the paper's anchor study, the researchers find no link between income diversification and profitability for large banks. The reason behind this is that the large bank benefits from diversification gains only up to a certain level. However, more engagement in fee based activities proved to beneficial to the banks.