Exploring bank diversification and performance: evidence from South Asia

Abstract This research aims to investigate the possible implications of diversification, which encompasses assets, funds, and income, on the financial performance of commercial banks within the South Asian context. This research employed a GMM framework for hypotheses testing utilizing a data set spanning from 2011 to 2023. The findings reveal that asset and funding diversification negatively impacts the profitability of banks at 5% and 10% levels of significance, respectively. However, an addition of economic growth in the model increases the level of significance at 1% and 5% to impact the performance of banks in South Asia, respectively. The findings depict that income diversification positively affects profitability at the 1% level of significance throughout the analysis. Our research provides an insightful examination of the significance of capitalization in the context of diversification. The negative impact of asset diversification on well-capitalized banks is higher than on undercapitalized banks; however, the funding diversification is significant at the 5% level of significance with a minor difference in estimators. It pertains to both well-capitalized and under-capitalized banks. The study shows how important it is to have diversification strategies and regulatory frameworks that are tailored to each situation. It also shows how macroeconomic factors and qualitative factors can be used to improve the performance and stability of banks.