Diversification and bank profitability: a nonlinear approach

Using information on 98 internationally active banks headquartered in 27 countries over the period 1994--2012, we analyse the nonlinear link between income diversification (defined as noninterest income to total income) and bank return on assets (ROA). The main result is that income diversification is positively correlated with bank profitability only up to a certain degree (30% of the diversification ratio). Diversification benefits for global systemically important banks (GSIBs) are less sizable and significant, especially when we use volatility-adjusted return as a measure of bank profitability.