The Effect of Non-Interest Income on Bank Profitability and Risk: Evidence from Turkey

Article Sidebar

html pdf xml
Published: 26-12-2024

Main Article Content

Nilgün Acar Balaylar
Dokuz Eylül University
Turkey
Turan Karımlı
Azerbaijan State Economic University
Turkey
Ahsen Emir Bulut
Dokuz Eylul University
Turkey
https://orcid.org/0000-0003-3475-9456
Vol 34 No 1 (2025), Articles, pages 9855
DOI: https://doi.org/10.15304/rge.34.1.9855
Submitted: 10-04-2024 Accepted: 02-10-2024 Published: 26-12-2024
Copyright How to Cite

Abstract

There are three purposes of this article, the first of which is to investigate the impact of non-interest income (NNII) on the profitability of banks assessed by both return on assets (ROA) and return on equity (ROE). The second one is to investigate the impact of NNII on risk, assessed by the volatility of return on assets (SdROA) and the volatility of return on equity (SdROE). The final one is to analyze the impact of the COVID-19 pandemic on bank profitability and risk. To achieve the above, the dynamic panel technique, a two-step GMM estimator, was used with the data of 25 deposit banks operating uninterruptedly from 2002 to 2021. The empirical results show that the NNII was positive and significantly correlated with ROA and ROE. The effect of NNII on the risk level appears to be negative and significantly related. In addition, during the COVID-19 period, it was determined that profitability decreased and risk increased. This shows that NNII is a vital shock absorber during an external shock. Therefore, it could be said that banks should attach importance to income diversification, and sector regulators should encourage innovation to create non-traditional products. Under the adverse conjuncture created by increasing public intervention and the pandemic, in recent years, Turkish banks have been encouraged to diversify their activities further rather than focus solely on traditional activities. NNII appears to be associated with higher profitability and lower risk.

Keywords:

Non-interest income, Profitablity, Risk, Dinamic panel data model
Cited by

Article Details

References

Abdelaziz, H., Rim, B., & Helmi, H. (2022). The Interactional Relationships Between Credit Risk, Liquidity Risk and Bank Profitability in MENA Region. Global Business Review, 23(3), 561–583. https://doi.org/10.1177/0972150919879304

Abedifar, P., Molyneux, P., & Tarazi, A. (2018). Non-interest income and bank lending. Journal of Banking & Finance, 87, 411–426. https://doi.org/10.1016/j.jbankfin.2017.11.003

Acharya, V. V., Hasan, I., & Saunders, A. (2006). Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios. The Journal of Business, 79(3), 1355–1412. https://doi.org/10.1086/500679

Acharya, V., & Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366. https://doi.org/10.1016/j.jfineco.2012.05.014

Adesina, K. S. (2021). How diversification affects bank performance: The role of human capital. Economic Modelling, 94, 303–319. https://doi.org/10.1016/j.econmod.2020.10.016

Adesina, K. S., & Mwamba, J. M. (2016). Do Basel III Higher Common Equity Capital Requirements Matter for Bank Risk‐taking Behaviour? Lessons from South Africa. African Development Review, 28(3), 319–331. https://doi.org/10.1111/1467-8268.12208

AlKhouri, R., & Arouri, H. (2019). The effect of diversification on risk and return in banking sector. International Journal of Managerial Finance, 15(1), 100–128. https://doi.org/10.1108/IJMF-01-2018-0024

Allen, F., & Santomero, A. M. (2001). What do financial intermediaries do? Journal of Banking & Finance, 25(2), 271–294. https://doi.org/10.1016/S0378-4266(99)00129-6

Anbar, A., & Alper, D. (2011). Bank specific and macroeconomic determinants of commercial bank profitability: Empirical evidence from Turkey. Business and Economics Research Journal, 2(2), 139-152. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1831345

Anginer, D., Bertay, A. C., Cull, R., Demirgüç-Kunt, A., & Mare, D. S. (2019). Bank regulation and supervision ten years after the global financial crisis. World Bank Policy Research Working Paper, 9044. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3485929

Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), 277. https://doi.org/10.2307/2297968

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D

Athanasoglou, P. P., Delis, M., & Staikouras, C. (2006). Determinants of bank profitability in the Southeastern European region. SSRN Electronic Journal, 47. https://doi.org/10.2139/ssrn.4163741

Baele, L., de Jonghe, O., & vander Vennet, R. (2007). Does the stock market value bank diversification? Journal of Banking & Finance, 31(7), 1999–2023. https://doi.org/10.1016/j.jbankfin.2006.08.003

BAT (2023). Türkiye and the Turkish banking system. https://www.tbb.org.tr/en/banks-and-banking-sector-information/statistics-and-data-query/statistical-reports/20

Bennaceur, S., & Goaied, M. (2008). The determinants of commercial bank interest margin and profitability: Evidence from Tunisia. Frontiers in Finance and Economics, 5(1), 106-130. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1538810

Berger, A. N., Hasan, I., & Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking & Finance, 34(7), 1417–1435. https://doi.org/10.1016/j.jbankfin.2010.01.010

Bian, W., Wang, X., & Sun, Q. (2015). Non‐interest Income, Profit, and Risk Efficiencies: Evidence from Commercial Banks in China. Asia-Pacific Journal of Financial Studies, 44(5), 762–782. https://doi.org/10.1111/ajfs.12112

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8

Bond, S. R. (2002). Dynamic panel data models: a guide to micro data methods and practice. Portuguese Economic Journal, 1(2), 141–162. https://doi.org/10.1007/s10258-002-0009-9

Brahmana, R., Kontesa, M., & Gilbert, R. E. (2018). Income diversification and bank performance: Evidence from Malaysian banks. Economics Bulletin, 38(2), 799-809. https://econpapers.repec.org/RePEc:ebl:ecbull:eb-17-00597

Brighi, P., & Venturelli, V. (2014). How do income diversification, firm size and capital ratio affect performance? Evidence for bank holding companies. Applied Financial Economics, 24(21), 1375–1392. https://doi.org/10.1080/09603107.2014.925064

BRSA (2006). Ratios and Limitations on which Banks are Obligated to Comply with the Relevant Legislation, https://www.bddk.org.tr/Mevzuat/DokumanGetir/958.

BRSA (2023). 2022 Annual Report, Working Paper. https://www.bddk.org.tr/KurumHakkinda/EkGetir/5?ekId=261

Chen, N., Liang, H.-Y., & Yu, M.-T. (2018). Asset diversification and bank performance: Evidence from three Asian countries with a dual banking system. Pacific-Basin Finance Journal, 52, 40–53. https://doi.org/10.1016/j.pacfin.2018.02.007

Chiorazzo, V., Milani, C., & Salvini, F. (2008). Income Diversification and Bank Performance: Evidence from Italian Banks. Journal of Financial Services Research, 33(3), 181–203. https://doi.org/10.1007/s10693-008-0029-4

Chronopoulos, D. K., Girardone, C., & Nankervis, J. C. (2011). Are there any cost and profit efficiency gains in financial conglomeration? Evidence from the accession countries. The European Journal of Finance, 17(8), 603–621. https://doi.org/10.1080/1351847X.2010.538300

Craig, B. R., & Dinger, V. (2013). Deposit market competition, wholesale funding, and bank risk. Journal of Banking & Finance, 37(9), 3605–3622. https://doi.org/10.1016/j.jbankfin.2013.05.010

Crosignani, M. (2021). Bank capital, government bond holdings, and sovereign debt capacity. Journal of Financial Economics, 141(2), 693–704. https://doi.org/10.1016/j.jfineco.2021.04.005

Cuong, L. K., & Pham, H. (2021). Direct and indirect impacts of European banks’ regulation. Finance Research Letters, 40, 101738. https://doi.org/10.1016/j.frl.2020.101738

Davydenko, A. (2011). Determinants of bank profitability in Ukraine. Undergraduate Economic Review, 7(1), 2. https://digitalcommons.iwu.edu/uer/vol7/iss1/2

Demirguc-Kunt, A., & Huizinga, H. (1999). Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence. The World Bank Economic Review, 13(2), 379–408. https://doi.org/10.1093/wber/13.2.379

Dempsey, M., Edirisuriya, P., & Gunasekarage, A. (2013). Stock Market’s Assessment of Bank Diversification: Evidence from Listed Public Banks in South Asian Countries. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2247775

DeYoung, R., & Roland, K. P. (2001). Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model. Journal of Financial Intermediation, 10(1), 54–84. https://doi.org/10.1006/jfin.2000.0305

DeYoung, R., & Rice, T. (2004). How do banks make money? The fallacies of fee income. Economic Perspectives-Federal Reserve Bank of Chicago, 28(4), 34.

Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307–327. https://doi.org/10.1016/j.intfin.2010.11.002

Elsas, R., Hackethal, A., & Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of Banking & Finance, 34(6), 1274–1287. https://doi.org/10.1016/j.jbankfin.2009.11.024

Elyasiani, E., & Wang, Y. (2012). Bank holding company diversification and production efficiency. Applied Financial Economics, 22(17), 1409–1428. https://doi.org/10.1080/09603107.2012.657351

Hidayat, W. Y., Kakinaka, M., & Miyamoto, H. (2012). Bank risk and non-interest income activities in the Indonesian banking industry. Journal of Asian Economics, 23(4), 335–343. https://doi.org/10.1016/j.asieco.2012.03.008

Hsieh, M., Chen, P., Lee, C., & Yang, S. (2013). How Does Diversification Impact Bank Stability? The Role of Globalization, Regulations, and Governance Environments. Asia-Pacific Journal of Financial Studies, 42(5), 813–844. https://doi.org/10.1111/ajfs.12032

Islam, M. A., Sarker, M. N. I., Rahman, M., Sultana, A., & Prodhan, A. S. (2017). Determinants of profitability of commercial banks in Bangladesh. International Journal of Banking and Financial Law, 1(1), 1-11.

Ivashina, V., & Scharfstein, D. (2010). Bank lending during the financial crisis of 2008. Journal of Financial Economics, 97(3), 319–338. https://doi.org/10.1016/j.jfineco.2009.12.001

Judson, R. A., & Owen, A. L. (1999). Estimating dynamic panel data models: a guide for macroeconomists. Economics Letters, 65(1), 9–15. https://doi.org/10.1016/S0165-1765(99)00130-5

Kawshala, H. (2017). The factors effecting on bank profitability. International Journal of Scientific and Research Publications, 7(2), 212-216.

Khan, M. S., Scheule, H., & Wu, E. (2017). Funding liquidity and bank risk taking. Journal of Banking & Finance, 82, 203–216. https://doi.org/10.1016/J.JBANKFIN.2016.09.005

Lee, C.C., Yang, S.J., & Chang, C.H. (2014). Non-interest income, profitability, and risk in banking industry: A cross-country analysis. The North American Journal of Economics and Finance, 27, 48–67. https://doi.org/10.1016/j.najef.2013.11.002

Matyas, L. & Sevestre, P. (1996). The Econometrics of Panel Data, Kluwer Academic Publishers, The Netherlands.

Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from European banking sector. Journal of Financial Reporting and Accounting, 14(1), 86–115. https://doi.org/10.1108/JFRA-05-2015-0060

Meslier, C., Tacneng, R., & Tarazi, A. (2014). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions and Money, 31(1), 97–126. https://doi.org/10.1016/J.INTFIN.2014.03.007

Nguyen, J. (2012). The relationship between net interest margin and noninterest income using a system estimation approach. Journal of Banking & Finance, 36(9), 2429–2437. https://doi.org/10.1016/J.JBANKFIN.2012.04.017

Nickell, S. (1981). Biases in Dynamic Models with Fixed Effects. Econometrica, 49(6), 1417. https://doi.org/10.2307/1911408

Nisar, S., Peng, K., Wang, S., & Ashraf, B. (2018). The Impact of Revenue Diversification on Bank Profitability and Stability: Empirical Evidence from South Asian Countries. International Journal of Financial Studies, 6(2), 40. https://doi.org/10.3390/ijfs6020040

Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203–2215. https://doi.org/10.1016/J.JBANKFIN.2012.03.021

Porter, R. L., & Chiou, W. P. (2013). How has capital affected bank risk since implementation of the Basel accords. Banks and Bank System, 1, 1-52.

Ramadan, I. Z., Kilani, Q. A., & Kaddumi, T. A. (2011). Determinant Of Bank Profitability: Evidance From Jordan. International Journal of Academic Research, 3(4).

Roodman, D. (2009). How to do Xtabond2: An Introduction to Difference and System GMM in Stata. The Stata Journal: Promoting Communications on Statistics and Stata, 9(1), 86–136. https://doi.org/10.1177/1536867X0900900106

Rueda Cantuche, J. M. (2021). La economía de la Unión Europea en tiempos de COVID-19. Revista Galega de Economía, 30(1), 1–17. https://doi.org/10.15304/rge.30.1.7663

Saif-Alyousfi, A. Y. H. (2022). Determinants of bank profitability: evidence from 47 Asian countries. Journal of Economic Studies, 49(1), 44–60. https://doi.org/10.1108/JES-05-2020-0215

Sanya, S., & Wolfe, S. (2011). Can Banks in Emerging Economies Benefit from Revenue Diversification? Journal of Financial Services Research, 40(1–2), 79–101. https://doi.org/10.1007/s10693-010-0098-z

Stiroh, K. J. (2004). Diversification in banking: Is noninterest income the answer?. Journal of money, Credit and Banking, 36(5), 853-882. https://www.jstor.org/stable/3839138

Stiroh, K. J. (2006). A portfolio view of banking with interest and noninterest activities. Journal of Money, Credit and Banking, 38(5), 1351-1361. https://www.jstor.org/stable/3839009

Sufian, F., & Habibullah, M. S. (2009). Determinants Of Bank Profitability In A Developing Economy: Empirical Evidence From Bangladesh. Journal of Business Economics and Management, 10(3), 207–217. https://doi.org/10.3846/1611-1699.2009.10.207-217

Tatoğlu, Y. F. (2020). Panel Zaman Serileri Analizi Stata Uygulamalı. Beta Yayınları, 2, 138.

Thornton, J., & di Tommaso, C. (2021). The effect of non‐performing loans on credit expansion: Do capital and profitability matter? Evidence from European banks. International Journal of Finance & Economics, 26(3), 4822–4839. https://doi.org/10.1002/ijfe.2042

Vidyarthi, H., & Mishra, R. K. (2020). Dynamics among banking penetration, transport infrastructure, and regional growth: an empirical note from Indian states. International Journal of Economic Policy in Emerging Economies, 13(1), 1. https://doi.org/10.1504/IJEPEE.2020.106682

Vinh, N.T.H. (2016). The impact of non-performing loans on bank profitability and lending behavior: Evidence from Vietnam. Journal of Economic Development, 24(3), 27-44.

Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking & Finance, 73, 16–37. https://doi.org/10.1016/j.jbankfin.2016.07.019

Williams, B., & Prather, L. (2010). Bank risk and return: the impact of bank non‐interest income. International journal of managerial finance, 6(3), 220–244. https://doi.org/10.1108/17439131011056233

Zhou, K. (2014). The effect of income diversification on bank risk: evidence from China. Emerging Markets Finance and Trade, 50(sup3), 201–213. https://doi.org/10.2753/REE1540-496X5003S312