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Exploring the asymmetric effects of loan portfolio diversification on bank profitability

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  • Huynh, Japan
  • Dang, Van Dan

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.

Suggested Citation

  • Huynh, Japan & Dang, Van Dan, 2022. "Exploring the asymmetric effects of loan portfolio diversification on bank profitability," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    • Handle: RePEc:eee:joecas:v:26:y:2022:i:c:s1703494922000111
    DOI: 10.1016/j.jeca.2022.e00250
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    Cited by:

    1. Ji‐Yong Seo, 2023. "Household loan portfolios and financial characteristics of Korean banks," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 37(2), pages 76-95, November.

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    More about this item

    Keywords

    Bank size; Diversification; Loan portfolio; State ownership;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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