Acharya et al. (2002) analyzed a sample of Italian Banks and report that
diversification of bank assets is not guaranteed to produce superior performance and
reduce risk. Depend on bank situation diversification of the bank is whether efficient or
not like high-risk banks, diversification reduces bank return while producing riskier
loans. For low-risk banks, diversification produces either an inefficient risk-return
trade-off or only a marginal improvement. The issue of focus versus diversification is
well documented in the corporate finance literature, although a consensus has not been
achieved. For example, while many studies provide evidence that conglomerates
perform more poorly than specialized firms do (e.g. Lang and Stulz, 1994; Berger and
Ofek, 1995; Lamontand Polk, 2002), other studies proves the opposite result that
diversification gains are an important rationale behind many activities undertaken by
financial institutions (Wolf Wagner, 2009). The diversification increases bank
profitability and market valuations (Ralf et al., 2009). The sectorial diversification is
associated with reduced return and reduced risk at the same time (Chen et al., 2013).
Amidu and Wolfe (2013) investigated how the revenue diversification of bank in
emergency and developing economies affects the relationship between competition and
stability. They found that positive and significant relationship between competition and
stability. This means greater competition in a banking sector enhances stability.
Moreover, the result shows that a competitive and diversified banking system is
associated with less risky loan portfolios. Lee and Hsieh (2013) found that non-interest
activities of Asian banks reduce risk, but do not increase profitability. As well as non-
interest activities raise risk for banks in high income countries, while increasing
profitability or reducing risk for banks in middle and low income countries.