An Empirical Test On The Relationship Between Bank Income Diversification And Bank Rate Of Return

Income diversification means commercial banks increase bank income, widening bank income channels, diversifying income composition through providing financial products and operation mode innovation which commercial banks invent. A large number of researches and practice improves that the income diversification is the inevitable trend of bank industry development in the future. The income diversification of bank industry in China develops well. The proportion of non-interest income is about20%in average which is similar to the proportion of America when they would transfer to mixed operation. At this time, it is of great importance to do the research of relationship between income diversification and bank rate of return to the direction of bank industry transition and the vigor and scope of product diversification.Through the analysis of theories, diversification theory, economy of scope theory and assets portfolio theory all agree that the diversification of produces and the expansion of business scope are beneficial for the increasing of bank revenue. However, the rightness of these assertions has to be based on specific foundation. The paper uses correlation analysis to examine the foundation.After controlling the bank micro features and the macroeconomic environment, this paper makes empirical study of relationship of income diversification and bank revenue. The percentage of net non-interest income to net operating income is the indicator of degree of product diversification. The ratio of net fee and commission income to net operating income and the ration of net trading income to net operating income are implications for different types of diversification. Rate of return on equity and rate of return on total assets are implications for bank revenue. The relationship between them is our main analyze objective.The results say the income diversification has positive influence to bank revenue while the fee and commission and trading all have negative impacts on bank revenue. It is a significant base for banks to accelerate the transition of bank industry that the positive relationship of income diversification and bank revenue. However, the empirical results have to be related to the current and unique features of Chinese bank industry. It is a reasonable way to making different income diversification objectives for different banks according to their own features. In addition, the Chinese banks rely more on fee income than commission income. In fact, the increasing of ability in consulting and financial management is a fatal way to gain core competitiveness for banks.This paper provided comprehensive collecting and analyzing of data about income diversification and bank revenue. The major drawback of previous researches is the covering scope of data. The data in this paper comes from the financial report of30banks in7years. To some degree, this guarantees the large sample property of analysis.It also presents relatively comprehensive analysis. It includes not only the regression analysis of income diversification and bank revenue but also the correlation analysis between income diversification and net interest income and cost to income ratio. It analyzes the performance of non-interest income in diversification of risk and cost saving which has strong relationship to the base of theories of this paper.There is certain limitation of the analysis results; however the attempt and the analysis frame are all of great importance.