Bank Diversification and Focus in Disruptive Times: China, 2007–2018

Bank diversification and focus strategies are becoming crucial issues for commercial banks’ future viability, due to their links with the emergence of new products, services and competitors. We investigate the effects of such strategies for Chinese banks during 2007–2018, a particularly turbulent period for both macroeconomic reasons (the impact of the 2007/08 international financial crisis) as well as others related to innovation in the industry—such as the rise of FinTech. For this, we construct measures of diversification from both the two main perspectives taken into account so far by the literature, namely, incomebased indicators and asset-based indicators. In the case of income-based indicators, we consider further categories—non-interest income ratio, the Herfindahl-Hirschman index, and the entropy index. We evaluate the impact of the different indicators considered on measures of risk and profitability, and whether this impact varies depending on the type of bank—state-owned banks, national shareholding commercial banks, and city commercial banks. We argue that the links can be too intricate to be captured by linear models and, complementing the previous literature, evaluate them considering semiparametric specifications. Overall results indicate that Chinese banks do not benefit to a great deal in terms of profitability and risk by following neither income nor asset diversification strategies, although the former are higher than the latter.