Digital Income Diversification and Bank Performance: Scale Advantages and Institutional Boundary Conditions in Emerging Asia

This study examines how digital income diversification, measured by the non-interest income ratio (NII), affects bank performance and risk in emerging Asian markets. Drawing on panel data from 44 banks across China (36) and Thailand (8) over 2022-2025, the analysis employs fixed-effects regressions, mediation analysis, and subsample testing to unpack the performance implications of digital transformation. Results indicate that NII exerts a statistically significant positive effect on bank profitability (ROA and ROE), with no corresponding increase in risk exposure as measured by Z-score. The relationship is markedly stronger among large banks, consistent with scale advantages in technology infrastructure, network effects, and regulatory compliance cost amortization. Cost efficiency does not mediate the NII-performance nexus, suggesting that revenue-side mechanisms dominate in this context. Cross-country comparisons reveal stable but modest effects in China's mature digital ecosystem against larger but less precise coefficients in Thailand's early-stage transition. These findings challenge the Western-centric complexity-risk narrative and highlight institutional boundary conditions governing digital banking outcomes in emerging markets.