Revisiting the Relationship Between Sectoral Loan Diversification and Bank Profitability: The Moderating Role of Digital Transformation

ABSTRACT This study examines the moderating role of digital transformation in the relationship between sectoral loan portfolio diversification and bank profitability, using panel data from Vietnamese commercial banks from 2008 to 2022. The key findings of the empirical analysis reveal that sectoral loan diversification is negatively associated with bank profitability, implying that banks with more diversified lending portfolios across economic sectors tend to experience lower returns. Further, we find that digital transformation significantly moderates this relationship, with well‐digitalized banks experiencing a less pronounced negative link between loan diversification and bank profits. Notably, for banks that have advanced the furthest in digital transformation, sectoral diversification can even enhance their profitability. This study makes a significant contribution to the literature by demonstrating how digital transformation reshapes the traditional trade‐offs associated with diversification strategies. Our findings provide actionable insights for policymakers and bank managers, emphasizing the strategic importance of digital transformation in optimizing diversification benefits and improving bank performance.