Does revenue diversification lead to greater stability and profitability of banks? Empirical evidence from Bangladesh

Purpose The aim of the study is to explore how revenue diversification in the form of noninterest income affects the profitability and stability of banks. Design/methodology/approach Two-step System Generalized Method of Moments (2-SGMM) model has been applied in this research paper to address the issue of simultaneity and endogeneity and get reliable, consistent, and efficient estimates for this study. Findings We find that revenue diversification in the form of noninterest income increases risk-adjusted profit and the stability of banks measured by the Zscore of banks. Our study employs various measures of risk (e.g. standard deviation of ROA, ROE and TQ) and return (ROA, ROE and TQ) to check the sensitivity of our findings and the result confirms the robustness of the original findings. The persistent nature of both risk and return of banks in Bangladesh is another important finding of this research. Originality/value This study is among the few that utilize a large sample of banks listed on the Dhaka Stock Exchange (DSE) to investigate the impact of revenue diversification on both the stability and profitability of banks.