Business Diversification, Spatial Diversification And Performance Of Commercial Banks

With the development of commercial banks, more and more banks becoming business diversification through supply different products and spatial diversification through building branches in new markets. This dissertation focuses on the relationship between the diversification and the performance of commercial banks.Modern portfolio theory suggests that both business diversification, loan diversification on industry & geography and spatial diversification have effects on risk diversify. However, the study on Chinese sample gives the proof that diversification will not cause risk diversify. At same time diversification will not cause revenue reduction necessarily.At the beginning of this dissertation, those papers about performance of commercial banks are reviewed, those focused on the relationship between performance and diversification are analyzed. After compared the different methods that used in the past papers, the dissertation set up the econometrics model based up on the Chinese commercial banks. The model is the basic methods to study the relationship between commercial banks'performance and different types of diversification. The dissertation includes the following parts:Firstly, the relationship between business diversification and commercial banks' performance focuses on the effects of non-interest income increasing on risk, profitability and cost of commercial banks. The seasonal data of 14 listed banks suggest that business diversification has positive effect on bank's Risk Adjusted Return during 2007-2008. At the same time, for the purpose of the high share of net interest income of Chinese commercial banks, the volatility of net interest income will decrease the Risk Adjusted Return and distance of default. The forward study on diversification of net interest income and non interest income suggest that net interest income diversification will cause the increase of profitability, cost on income and the volatility of price of stock. Non interest income diversification will increase the profitability, and decrease the cost and the price of stock.Secondly, loan diversification includes industrial diversification and geographic diversification. The empire study suggest that industrial diversification will neither increase return nor decrease non perform loan rate of 31 commercial banks 2006-2008, while geographic diversification will increase return and decrease non perform loan of 19 commercial banks 2006-2008.Thirdly, the relationship between spatial diversification and commercial banks' performance is the main topic. This part documents the character of spatial diversification among Chinese commercial banks during 2004-2008, and investigates how spatial diversification relates to bank's performance. The number of branch and the distance between head and branches are associated with significantly higher return and lower cost. The number of branch will increase the risk, while the distance between head and branches will decrease the risk of commercial banks.This dissertation is the first one study on the relationship between diversification and performance of China's commercial banks from different respects. With the study on the business diversification, the dissertation analyses the net interest diversification and non interest diversification deeply. There was no Chinese empire study in this field before. At the same time the dissertation uses distance proxy the spatial diversification as the supplementary to the number of branches. When study the loan diversification, the dissertation divide it into two types, which is industrial diversification and geographic diversification. The dissertation covered more samples than the earlier papers focus on commercial banks. Both listed banks and unlisted banks are included in this paper, and almost all types of commercial banks be used in empirical study.There still are works should be done in the future. With the improvement of information disclosure, the sample will expand enough to get more stable results. At the same time, distinguishing the cause and effect of different types of spatial diversification should be the main task in the future.