Bank Diversification and Performance Nexus: Theoretical and Empirical Insights from South Asia

Abstract The aims of the study include examining the relationship between assets, funding, income diversity, and bank performance using a panel dataset over the period ranging from 2011 to 2023 by applying a two-step system GMM procedure for South Asian banks. The findings reveal that diversity in funding sources and assets leads to decreases in the profitability of banks in South Asia. The findings imply that overdoing it in funding and asset diversity is not good for South Asian banks. However, the diversity in income sources causes the performance of South Asian banks to boost up. Implying that an increase in income sources causes an increase in the profits of South Asian banks. Moreover, the empirical analysis remains consistent for the outcome of well- and under-capitalized banks. The findings are also in line with the economics and finance theories, including portfolio diversification, resource-based theory, and agency hypothesis. The findings suggest that regulators, economists, policymakers, and managers should revise the composition of their banks’ assets and funding sources to optimize benefits in South Asian regions.