The Impact of Income Diversification on Banks' Efficiency: Evidence from Russia

The paper considers the impact of income diversification on efficiency of Russian banks. We perform stochastic frontier analysis of bank-level data over the period from Q1 2009 to Q4 2015. Then a regression analysis was performed to identify the nature of the relationship between banks' cost efficiency and income structure. The negative impact of income diversification and the positive impact of non-interest income on cost efficiency was revealed. The negative impact may be due to high costs during implementation of new banking products in order to diversify operations, while the positive impact of non-interest income is due to the growth of the client base as a result of entering into new areas of bank market and via reduction of fixed costs. Robustness test confirmed our results. However, there is an inverse relationship for large banks. The findings have implications for bank managers and investors.