The Effect Research Of Income Diversification On Profitability And Risk Of Chinese Commercial Banks

China’s commercial banks have reliant on net interest income as the main source for a long time. With the rapid financial liberalization, financial disintermediation and financial integration, the banking sector has to adjust the profit model and to explore non-interest income business.In order to explore the effects of income diversification on Chinese commercial banks, firstly the paper explains the current situation and driving factors of the state-controlled banks, national joint-stock banks and listed city commercial banks about diversification development. It concludes that net interest income is still the main part of Chinese commercial banks’ income, while the proportion of non-interest income is very low despite of the rapid development. Meanwhile, net fee and commission income accounts for a large proportion of non-interest income, which is quite different among banks.In the empirical part of this article, the paper tests the effects of diversification in banks’ financial performance and risk, based on the quarterly data of 13 listed Chinese commercial banks during the period of 2008 to 2014. According to the empirical results, income diversification can improve banks’ performance for all three sample groups, especially for the state-controlled banks and listed city commercial banks. However, income diversification is not beneficial for lower volatility of financial performance because non-interest income is positive correlated with interest income. During empirical tests, many other factors have effect on banks’ performance and risk. Firstly, effective cost control is significantly favorable to performance for all banks. Secondly, larger scale is beneficial to both performance and its stability for the national joint-stock banks. Thirdly, larger size of loans with lower ratio of non-performance loans improves stability for the national joint-stock banks. In the last part, the paper makes recommendations accordingly for three sample groups based on the current status and empirical results of business diversification.The innovation of this paper includes three aspects:First, the paper explores effects on both performance and risk to comprehensively explain income diversification of Chinese commercial banks. Second,13 sample banks are divided into three groups of the state-controlled banks, national joint-stock banks and listed city commercial banks, to comparatively analyze and make commendations. Third, the paper innovates an indicator to comprehensively explain the degree of income diversification based on HHI indicator, instead of types or ratio of non-interest business.