Multimarket Contact, Income Diversification and Bank Performance

Abstract

Abstract Faced with intense competition, banks may find geographic and income diversification strategies indispensable to remain competitive. Surprisingly, the literature has only discussed the two strategies separately, and there appears little effort in considering both strategies simultaneously, at least in the investigation of their intertwined impact on bank performance. We adopt System Generalized Method of Moments for a panel dataset covering commercial banks in Vietnam to investigate the impact of these diversification strategies on bank performance. The research findings suggest that multimarket contact has a positive impact on performance, supporting the mutual forbearance hypothesis. Income diversification is also positively related to bank profitability. Importantly, our results show that the interaction between multimarket contact and income diversification has a negative effect on bank profitability. This evidence implies that facing with multimarket contacts, a bank with diversified businesses is more likely to choose to compete, thus raising the competition and lowering its profitability.