Effects of revenue diversification on performance in banks and an investigation for bank deposits in Turkey

Banks are the fundamental structure of the financial system in the economies of developed and developing countries. The main function of the banks is to transfer the funds collected from funders in the form of deposits to those who request funds in the form of loans and establish a bridge between the two parties. Banks earn interest income as a result of this function, which constitutes traditional banking activity. However, increasing competition with globalization, shrinking profit margins and developing technology caused banks to diversify their sources of income, turning to non-interest income as well as interest income. Therefore, it is important to reveal the effect of this diversification in banks' income sources on performance in order to increase profitability and to have a strong structure. The aim of the study; the impact of diversification which 21 deposit banks operating in Turkey have made in their income sources between 2010-2018 periods on their performances has been researched. As an independent variable in the study, income diversification index (HHI), which is widely used in international examples; Return on assets (ROA) and return on equity (ROE) are used as dependent variables. The capital adequacy ratio, asset ratio, liquidity ratio, deposit growth rate, loan and provision ratio, which are considered to have an impact on the performance of the bank, are determined as control variables. The annual data of the banks included in the study for the period in question were subjected to panel data regression analysis and modeled using the Driscoll-Kraay (1998) estimator. According to the result of the analysis issued, it is concluded that the income diversification that banks have been conducted gives a positive contribution to their performances. More explicitly, it is observed that that the diversification in their income sources which banks have been conducted by tending from interest income to out of/non interest income has increased both their return on equity and return on assets. When the analysis findings are analyzed in terms of control variables, it is concluded that capital adequacy ratio, liquidity management and provision ratio have a meaningful effect on bank profitability. Among these factors, it has been observed that the effect of the capital adequacy ratio is positive whereas that of liquidity and reserve ratio is negative. Keywords: Income Diversification, Banking, Financial Performance, Non-Interest Income, Interest Income