Income Diversification and Bank Risk-Return Trade-Off on the Nepalese Commercial Banks

Abstract

This research seeks at investigating the impact of income diversification on the risk return trade-off in the Nepalese Commercial Banks during the time period (2069/702075/76). The secondary data are collected from Banking and Financial Statistics and

annual reports of the selected commercial banks.

Risk adjusted performance variables indicators: risk adjusted return on assets and risk adjusted return on equity are the dependent variables, while non-interest income, Herfindahl-Hirschman Index–HHI, equity to total assets ratio, loan to total assets ratio, foreign ownership and size are independent variables. The study has employed descriptive research design. The multiple regression models are used to test the impact and relationship between income diversification variables and the risk adjusted performance of Nepalese commercial banks. The results show that non-interest income, foreign ownership and bank size are positively correlated to risk adjusted return on assets and negatively correlated with HHI, equity and Loan. It indicates that higher the non-interest income, foreign ownership and bigger the bank size, higher would be the risk adjusted returns on assets. Similarly, non-interest income, HHI, foreign ownership and size have positive correlation with risk adjusted return on equity and have negative correlation with equity and loan. The regression model1 results conclude that the beta coefficients are positive for non-interest income, HHI, foreign ownership and size on risk adjusted return on assets and have negative beta coefficient are for equity and loan. The regression model2 results shows that the beta coefficient is positive for non-interest income, HHI and size on risk adjusted return on equity and have negative beta coefficient for equity, loan and foreign ownership. The study concludes that equity followed by non-interest income are dominant factor in the risk adjusted on assets. Similarly, loan, equity and income diversification index HHI are the dominant factor in risk adjusted return on equity in the context of Nepalese commercial banks