Do Income Diversification and Digital Transformation Enhance Risk-Adjusted Bank Performance? Evidence from VietNam

Abstract

Background: Income diversification (DIV) and digital transformation (ICT Index) are increasingly adopted by banks to enhance competitiveness and manage risks, yet their impacts on risk-adjusted performance remain debated.

Objective: This study examines the effects of income diversification and digital transformation on the risk-adjusted performance of Vietnamese commercial banks from 2009 to 2022.

Methodology: This study employs an unbalanced panel data set comprising 28 banks over a 14-year period (392 bank-year observations). To rigorously assess bank performance—measured by Return on Assets (ROA), Return on Equity (ROE), and their respective volatilities (SDROA, SDROE)—the researchers utilise a suite of advanced panel estimation techniques. Specifically, the researchers employed Feasible Generalised Least Squares (FGLS), Panel-Corrected Standard Errors (PCSE), and Driscoll–Kraay Standard Errors (SCC) to correct for common econometric issues. Finally, the dynamic System Generalised Method of Moments (System GMM) was used to address potential endogeneity.

Result: Income diversification consistently enhances risk-adjusted performance, especially in dynamic models. The ICT Index is positive but insignificant, and the interaction term (DIV × ICT Index) turns negative in some models, indicating the absence of synergy. Control variables indicate that bank size and capital adequacy improve stability, whereas human capital efficiency unexpectedly exerts an adverse effect. Inflation shows a modest positive influence, whereas GDP growth has little impact.

Conclusion: Diversification provides immediate and reliable stability, while digital transformation is a longer-term investment that requires deeper integration and strategic alignment to deliver consistent benefits.

Unique Contribution: This study offers new evidence from Vietnam, emphasising the stabilising role of diversification and the limited effects of digital transformation when not strategically coordinated.

Key Recommendation: Policymakers and managers should prioritise income diversification as a proven risk-management tool, while cautiously designing integrated digital strategies that address current misalignments to ensure long-term, risk-adjusted efficiency.