This study investigates the impact of loan portfolio diversification and income diversification on interest margin in ASEAN-4 banking markets. Loan portfolio diversification consists of credit to different sectors as well as different types of credit offered to customers. This study applies the extension of Ho and Saunders (1981) model by Maudos and Solis (2009). Static as well as dynamic panel data using System Generalized Method of Moment (System GMM) are used to estimate the model. The result shows decreasing trend in the banks net interest margin; it is consistent with the increase in the selling of the banks non-traditional products in this market, which indicates the existence of cross-subsidy in revenue from non-traditional to traditional banking products. In line with Allens (1988) theoretical framework, less diversification in credit sectors positively and significantly affect the net interest margin, which means the banks enjoy higher margin in certain sectors in which they have an expertise. Furthermore, we find that lesser competition, as well as foreign bank penetration significantly decrease the net interest margin.

Foreign Bank Penetration; Market Power; Loan Portfolio Diversification; Net Interest Margin; Non-Interest Income Diversification

• Prof. Dezie Leonarda Warganegara, Ph.D.

• Yosman Bustaman, S.T., M.Bus.