<p>This study examines the relationship between income diversification and the financial stability of Vietnamese commercial banks over the period 2015–2024, a decade marked by structural reforms, rapid digital transformation and increasing fintech competition. Income diversification is measured using a Herfindahl–Hirschman Index-based approach, while financial stability is proxied by the Z-score. Using panel data from 26 banks, the study employs fixed effects estimation and feasible generalized least squares to address heteroskedasticity and autocorrelation, complemented by an instrumental variable approach to account for potential endogeneity. The study addresses an important issue in contemporary banking risk management literature: whether expanding non-interest income activities enhances or weakens bank stability in emerging financial systems undergoing structural transformation. The results show that income diversification is positively and significantly associated with financial stability, suggesting that more balanced income structures are associated with lower insolvency risk. In addition, loan-to-total-assets ratio, net interest margin and bank size are positively associated with stability, whereas inflation is negatively associated with financial resilience. By focusing on a reform-driven emerging economy, the study extends recent literature on bank risk management and diversification by showing that the stabilizing role of diversification may vary across institutional transition, operational efficiency and macroeconomic conditions. These findings remain robust after controlling for endogeneity. The findings provide implications for bank managers and policymakers regarding revenue structure strategies and financial system resilience in emerging banking markets.</p>