INCOME DIVERSIFICATION AND ITS EFFECTS ON PROFITABILITY AND RISK: A STUDY OF BRAZILIAN BANKS

Resumen

Banks generally have two main types of income: interest-related income, or simply interest income, and non-interest-related income, or non-interest income. This study presents an analysis of the impact that income diversification has on profitability (measured by ROE and ROA), insolvency risk (measured by ZScore), and risk-adjusted return (measured by the ratio of ROE and ROA to their respective standard deviations) of banks. The analysis considers diversification between income groups (interest and non-interest) and diversification within each group, where different types of interest and non-interest income were considered. The sample used consists of data from 16 representative Brazilian banks of the National Financial System (SFN) for the period from 2012 to 2021, with eight state-owned banks and eight private banks; almost entirely data were collected from the IF.data system of the Central Bank of Brazil (Bacen). We adopted a multiple linear regression model with balanced panel data, employing the Ordinary Least Squares (OLS) method with fixed effects, considering both the fixed effect of entities and the fixed effect of time, and using, in addition to income diversification ratios, other control variables commonly used in literature.  Although the literature suggests that income diversification contributes to risk reduction, increased profitability, and improved risk-adjusted returns, our statistical analysis does not provide significant evidence to support these associations. Sample limitations may explain this outcome, highlighting the need for further research to assess this relationship.