Income Diversification, Credit Risk, and Bank Stability: Evidence from Vietnamese Commercial Banks

Abstract

This study examines the effects of income diversification on the stability of Vietnamese commercial banks, with particular attention to the roles of credit risk, profitability, and capital adequacy. Using panel data from 406 bank-year observations covering the period 2010–2024, the study employs the two-step system Generalized Method of Moments (System GMM) estimator to address endogeneity and dynamic effects. The results indicate that income diversification has no significant direct impact on bank stability, credit risk, or profitability. In contrast, capital adequacy exhibits a U-shaped nonlinear relationship with both bank stability and profitability. The findings suggest that the positive effects of capital adequacy emerge only after threshold levels of approximately 7.6% for bank stability and 8.1% for profitability. The interaction between income diversification and capital adequacy is statistically insignificant, indicating no moderating effect. These findings highlight the importance of maintaining adequate capital buffers rather than relying solely on income diversification to enhance banking resilience. The study provides new evidence from an emerging economy and offers practical implications for bank managers and policymakers seeking to strengthen financial stability.