Banks Hit a Profitability Tipping Point at $1.3 Billion in Assets, Study Finds

For decades, economists have debated whether bigger banks are simply better banks, and the answer has always seemed to depend on who was asking. Now a new study of Southeast Asian commercial banks offers one of the clearest answers yet, and it comes in the form of a surprisingly precise number: USD 1.3 billion in total assets. Below that line, a bank’s net interest margin—the spread it earns between what it pays depositors and what it charges borrowers—translates only modestly into profit. Above it, the same margin becomes dramatically more powerful, amplifying returns in a way that smaller rivals cannot match. The research, published in the journal Discover Sustainability, suggests that bank profitability in emerging economies does not scale smoothly but instead passes through a structural tipping point.

The study, conducted by Huong Thi Thu Pham of Hung Vuong University, Nga Thi Pham of Thai Nguyen University of Economics and Business Administration, Anh The Khuc and Anh Bao Nguyen of the National Economics University in Hanoi, set out to resolve a stubborn weakness in the banking literature. Most previous analyses of how net interest margins affect profitability assumed a linear relationship: every additional basis point of margin was presumed to add roughly the same amount of profit regardless of the bank’s size. Others divided banks into small, medium, and large categories using arbitrary cutoffs chosen by the researchers rather than by the data. Both approaches, the authors argue, risk missing the scale-dependent structural breakpoints that actually govern how banking business models perform.

To find where that breakpoint lies, the team turned to an endogenous panel threshold regression framework, a statistical technique that lets the data itself reveal the critical value at which the relationship between two variables changes. Rather than imposing a threshold chosen in advance, the model searches across possible asset levels and identifies the point that best splits the sample into two distinct regimes. Applied to a panel of 58 commercial banks across Southeast Asia observed from 2013 to 2025, the procedure converged on a specific total asset threshold of USD 1.3 billion, expressed in the model’s logarithmic scale as a size value of 14.0794. The precision of the estimate matters because it transforms an abstract question about economies of scale into an actionable benchmark that regulators and bank executives can actually use.

The coefficients on either side of that line tell a striking story. Below the threshold, each unit of net interest margin is associated with an estimated profitability coefficient of 0.2608. Above the threshold, the same coefficient rises to 0.4014—an increase of more than half. In practical terms, this means that once a bank crosses the critical asset scale, every increment of core intermediation income it generates contributes substantially more to its bottom line than the identical increment would at a smaller institution. Crucially, the study finds that crossing the threshold amplifies rather than reverses the profitability benefits of margins, countering any suggestion that oversized banks suffer diminishing returns on their core lending business in emerging markets.

The mechanism behind this asymmetry, the authors contend, lies in economies of scale. Larger banks can spread fixed operating costs—branch networks, core banking systems, compliance infrastructure, risk management platforms—across a much wider asset base. They typically enjoy stronger bargaining power in funding markets, allowing them to gather deposits and wholesale funding more cheaply. They can also invest in the technology and analytical capacity needed to price loans more accurately and manage credit risk more efficiently. Together, these advantages mean that interest income is generated with less waste, so a greater share of each unit of margin flows through to net profits. The threshold result captures the point at which these scale economies become decisive enough to visibly change the margin-to-profit relationship.

The timing of the study gives its findings particular weight. The 2013 to 2025 window spans a period of profound stress and transformation in Southeast Asian banking, including the disruptions of the pandemic era, shifting interest rate cycles, and accelerating digitalization. Sustainable profitability—the ability of banks to remain consistently profitable across such turbulence rather than enjoying isolated windfall years—is critical for emerging economies, where commercial banks supply the overwhelming majority of external financing for firms and households. When bank margins translate efficiently into profits, banks can absorb losses, maintain lending through downturns, and support the robust flow of economic credit that development strategies depend on.

For policymakers in emerging economies, the implications are direct. The authors argue that government support programs and banking consolidation strategies should explicitly target scale optimization rather than treating bank size as an afterthought. In many Southeast Asian markets, the banking sector remains fragmented, with dozens of small institutions competing in the same territories and duplicating infrastructure. The threshold evidence suggests that policies encouraging mergers, acquisitions, or organic growth up to and beyond the USD 1.3 billion mark could unlock measurable efficiency gains across the system. At the same time, the finding invites careful calibration: consolidation policy must balance the efficiency benefits of scale against the competition and systemic risk considerations that have long dominated the regulatory conversation.

Bank managers receive an equally concrete prescription. The study advises executives to prioritize asset growth and cost reduction in order to leverage the asymmetric benefits of net interest margin. For institutions still below the threshold, the message is that margin expansion alone will deliver only limited profit gains; the strategic payoff arrives when margin management is paired with a credible path across the critical scale. For banks already above the line, the results justify continued investment in scale-sensitive capabilities, from digital delivery channels to centralized credit underwriting, that deepen the economies of scale the threshold analysis reveals. Cost discipline, in this framing, is not merely housekeeping but a precondition for converting intermediation income into durable profitability.

Methodologically, the paper’s contribution lies in demonstrating what endogenous threshold modeling can uncover where linear panels cannot. By letting the breakpoint emerge from the data, the approach avoids the arbitrary size classifications that have fragmented earlier findings and provides a replicable template for studying scale effects in other regions and other financial systems. The framework could readily be applied to banking markets in other emerging economies, to different profitability measures such as return on average assets, or to other candidate thresholds defined by capitalization, deposit base, or loan book size. If the Southeast Asian pattern holds elsewhere, the notion of a universal, size-blind relationship between margins and profits may need to be retired altogether.

The study also carries a broader warning for the field of sustainable finance research. As attention shifts toward environmental and governance dimensions of banking stability, the new results are a reminder that the humble mechanics of intermediation—how efficiently a bank turns its interest spread into retained earnings—remain foundational. A banking sector whose small institutions struggle to convert margins into profits is a sector with thinner loss-absorbing buffers, weaker capacity to fund green transitions, and greater vulnerability to shocks. By pinpointing the exact asset scale at which that conversion becomes efficient, the research offers emerging economies a quantified target in the pursuit of resilient, sustainable financial systems, and gives the global debate over bank size a number worth arguing about.

Subject of Research: Threshold effects of bank size on the relationship between net interest margin and sustainable profitability in Southeast Asian emerging economies

Article Title: Threshold effects of net interest margin on bank sustainable profitability in emerging economies

Article References: Pham, H. T. T., Pham, N. T., Khuc, A. T., & Nguyen, A. B. (2026). Threshold effects of net interest margin on bank sustainable profitability in emerging economies. Discover Sustainability. https://doi.org/10.1007/s43621-026-04921-z

Image Credits: AI Generated

DOI: 10.1007/s43621-026-04921-z

Keywords: net interest margin, bank profitability, threshold regression, economies of scale, Southeast Asia, emerging economies, commercial banks, banking consolidation, ROAA, sustainable finance, panel data, financial economics