Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies?

In this study, we contribute to the ongoing debate on the costs and benefits of bank diversification. Diversification may benefit banks if diversified activities are inherently less risky or yield a high return, while it may hurt banks if diversified activities are more dangerous or possess low return. Using bank-level data from Indonesia, Malaysia, the Philippines, Thailand, and Vietnam over the period 2011–2015, we find that overall banks benefit from diversification; that is, the diversified banks have higher performance and lower risk. However, we further observe that diversified activities heterogeneously benefit banks. While the revenue diversification has a robust positive impact on bank performance and stability, the effect of assets diversification varies from country-to-country. Our results imply that banks can prioritize activities for diversification to maximize the benefits.