Income Diversification and Bank Performance: Evidence from Indonesian Commercial Banks

In the last few years it has been possible to observe decreasing interest margins for Indonesian banks. Banks are now moving towards diversification of their revenues to reduce risk of their portofolios and to increase profitability. Non-interest incomes have become an increasingly important of Indonesian banks’ operating income as one of the stable sources of bank revenues. Non-interest income now accounts 25 percent of operating income in the Indonesian banks. This study considers the income diversification in the Indonesian banking sector by analyzing the relationship between non-interest income and profitability by using data from 26 public banks listed in Indonesia Data Exchange (IDX) in the period of 2008 to 2015. The result of this research was shown that income diversification negatively affected profitability and risk adjusted return on total assets. On the other hand, the existence of bank characteristics also contributes on determining bank’s level of performance.