DETERMINANTS OF BANK PROFITABILITY: THE CASE OF THE REGIONAL DEVELOPMENT BANK (BPD BANK) IN INDONESIA

https://doi.org/10.22146/jieb.17331

Heyvon Herdhayinta(1*), R.A. Supriyono(2)

(1) Universitas Gadjah Mada
(2) Universitas Gadjah Mada
(*) Corresponding Author

Abstract


Introduction: The Regional Development Bank (BPD Bank) is expected to be a strong, highly competitive bank, which will contribute to the growth and even distribution of sustainable regional economies. Background Problem: A review by the Financial Service Authority (OJK) of the BPD Bank’s business growth indicates the low competitiveness of the BPD Bank, relative to other commercial banks. Novelty: Limited prior studies have been conducted on the profitability determinants of the BPD Bank, especially in Indonesia, and previous studies have only focused on the internal determinants of profitability. Hence, this research aims to analyze both the internal and external profitability determinants of the BPD Bank in Indonesia. Research Method: This study analyzes 135 observations in total from all 27 BPD banks in Indonesia for five years, from 2011 to 2015. This research measured bank profitability using ROA and ROE as the dependent variables. The independent variables are the internal and external determinants of bank profitability. The internal determinants of profitability consist of TA, TCORCAP, CAR, NPL, LDR, OE/OI and NIM; whilst the external determinants include TMS, INF and BIRATE. Findings: The findings of this study show that the profitability of the BPD Bank, as measured by its Return on Assets (ROA) and Return on Equity (ROE), is significantly determined internally by the total assets, LDR, OE/OI, and NIM and externally by the BIRATE and inflation. Those variables have positive relationships with profitability, except for OE/OI and inflation, which have negative relationships with profitability. In addition, two hypotheses are only partially supported, in which the total core capital and CAR show negative relationships only with ROE. Conclusion: The findings of this paper provide a deeper insight to help manage the profitability of the BPD Bank, which eventually can promote sustainable economic development.

Keywords


BPD Bank, total assets (TA), total core capital (TCC), capital adequacy ratio (CAR), non performance loans (NPLs), loan to deposit ratio (LDR), operating expenses/operating revenue (OE/OR), and net interest margin (NIM), the total of money supply (TMS),

Full Text:

PDF


References

Abreu, M., & Mendes, V. (2002). Commercial bank interest margins and profitability: Evidence from E.U countries. (Porto Working Paper Series). Retrieved from https://www.researchgate.net/publication/237460076_COMMERCIAL_BANK_INTEREST_MARGINS_AND_PROFITABILITY_EVIDENCE_FOR_SOME_EU_COUNTRIES

Aburime, T. (2008). Determinants of Bank Profitability: Macroeconomic evidence from Nigeria. (Working Paper Department of Banking and Finance, University of Nigeria). Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1231064

Alfriska, M., & Haryani, S. (2011, May). Regional development banks performance in Indonesia. In The First International Credit Union Conference on Social Microfinance and Community Development, BKCU Kalimantan-Gunadarma University. Universitas Gunadarma.

Aryanti, L. (2010). Effect of CAR, NIM, LDR, ROA, ROA and quality earning assets gain on changes in commercial banks in Indonesia. (Master’s thesis, Diponegoro University, Semarang, Indonesia). Retrieved from http://eprints.undip.ac.id/24275/

Athanasoglou, P.P., Delis, M.D., & Staikouras, C.K. (2008). Determinants of bank profitability in the South Eastern Europe region. (Munich Personal RePEc Archive, No 10274). Retrieved from https://mpra.ub.uni-muenchen.de/10274/

Athanasoglou, P.P., Brissimis, S.N., & Delis, M.D. (2005). Bank-specific, industry-specific and macroeconomic determinants of Bank Profitability. (Working Paper No. 25, Bank of Greece). Retrieved from https://ideas.repec.org/p/bog/wpaper/25.html

Azam, M., & Siddiqui, S. (2012). Domestic and foreign banks' profitability: Differences and their determinants. International Journal of Economics and Financial, 2(1), 33-40.

Barajas, A., Steiner, R., & Salazar, N. (1999), Interest spreads in banking in Colombia 1974-1996. (IMF Staff Papers: 196-224). Retrieved from https://www.imf.org/external/Pubs/FT/staffp/ 1999/06-99/barajas.htm

Bashir, A.M., & Hassan, M.K. (2003). Determinants of Islamic banking profitability. Presented on the ERF 10th Annual Conference. Retrieved from https://www.erf.org.eg/tenthconf/Financial _Markets_ Presented/Kabir_Bashir.pdf

Berger, A.N. (1995). The relationship between capital and earnings in banking. Journal of Money, Credit and Banking, 27(2), 432-456.

Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking and Finance, 13, 65-79.

Buchory, H.A. (2014). Analysis of the effect of capital, credit risk and profitability on the implementation of a banking intermediation function (Study on Regional Development Bank All Over Indonesia Year 2012). International Journal of Business, Economics and Law, 4(1), 133-144.

Buchory, H.A. (2015). Banking intermediation, operational efficiency and credit risk in banking profitability. International Journal of Business, Economics and Law, 7(2), 57-63.

Buchory, H.A. (2016). Determinants of banking profitability in Indonesian regional development banks. Actual Problems in Economics, 177, 303-318.

Burki, A.A., & Niazi, G.S.K. (2003). The effects of privatization, competition and regulation of banking efficiency in Pakistan, 1991-2000. Presented at CRC Conference, University of Manchester, UK. Retrieved from https://www.researchgate.net/publication/257356667 _The_Effects_of_Privatization_Competition_and_Regulation_on_Banking_Efficiency_in_Pakistan_1991_-_2000

Chaniago, H., & Widyantoro, H. (2017). RBBR model: A prediction model of bank health levels based on risk for Regional Development Banks (BPD) in Indonesia. Journal of Economics, Business, and Accountancy Ventura, 20(1), 47-60.

Ch, I. (2017). The banks’ rating analysis (The differences between the regional development banks and non-foreign exchange commercial banks in Indonesia). International Journal of Scientific and Technology Research, 6(6), 179-186.

Demirguc-Kunt, A., & Huizinga, H. (1999), Determinants of commercial bank interest margins and profitability: Some international evidence. The World Bank Economic Review, 13(2), 379-408.

Demirguc-Kunt, A., & Huizinga, H. (2000). Financial structure and bank profitability. World Bank Policy Research WP 2430). Retrieved from http://siteresources.worldbank.org/INTFR/Resources/ 475459-1108132178926/Kunt_Huizinga.pdf

Fries, S., & Taci, A. (2005). Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries. Journal of Banking & Finance, Elsevier, 29(1), 55-81.

Grigorian, D., & Manole, V. (2006). Determinants of commercial bank performance in transition: An application of data envelopment analysis. Comparative Economic Studies, 48 (3), 497-522.

Haron, S. (2004). Determinants of Islamic banks’ profitability. The Global Journal of Finance and Economics, 01(01), 2-18.

Javaid, S., Anwar, J., Zaman, K., & Gaffor, A. (2011). Determinants of bank profitability in Pakistan: Internal factor analysis. Mediterranean Journal of Social Sciences, 2(1), 59-78.

Kosmidou, K., Pasiouras, F., Doumpos, M., & Zopounidis, C., (2004). Foreign versus domestic banks performance in the UK: A multicriteria approach. Computational Management Science, 1(34), 329-343.

Kosmidou, K. (2008). The determinants of banks' profits in Greece during the period of EU financial integration. Managerial Finance, 34(3), 146-159.

Levine, R. (1998). The legal environment, banks, and long-run economic growth. Journal of Money, Credit and Banking, 30, 596-613.

Mamatzakis, E. C. & Remoundos, P. C. (2003), Determinants of Greek commercial banks profitability 1989 – 2000. SPOUDAI, 53(1), 94-94.

Mawardi. (2004). The analysis of factors-factors influencing commercial bank financial performance. (Master Thesis, Universitas Diponegoro, Semarang, Indonesia). Retrieved from http://eprints.undip.ac.id/10135/

Miller, S., & Noulas, A. (1997). Portfolio mix and large-bank profitability in the USA. Applied Economics, 29, 505-512.

Molyneux, P., & Thornton, J. (1992). Determinants of European banks’ profitability: A note. Journal of Banking and Finance, 16, 1173-1178.

Naceur, S.B. (2003). The determinants of the Tunisian banking industry profitability: Evidence panel. (Université Libre de Tunis: Department of Finance). Retrieved from http://www.mafhoum.com/press6/174E11.pdf

Naceur, S.B., & Goaied, M. (2001). The determinants of the Tunisian deposit banks’ performance. Applied Financial Economics, 11, 317-319.

Naceur, S.B., & Goaied, M. (2010). The determinants of commercial banks’ interest margins and profitability: Evidences from Tansania. Jornal of Frontiers in Economics and Finance, 1(11), 317-319.

Otoritas Jasa Keuangan (OJK). (2015). Overview BPD bank’s business growth year 2014. Retrieved from https://www.ojk.go.id/id/kanal/perbankan/berita-dan-kegiatan/publikasi/Pages/Tinjauan-Bank-Pembangunan-Daerah-2014.aspx

Otoritas Jasa Keuangan (OJK). (2015). BPD transformation program: Becoming competitive, strong and contributive bank for regional development. Retrieved from https://www.ojk.go.id/id/kanal/perbankan/berita-dan-kegiatan/publikasi/Pages/Program-Transformasi-BPD.aspx

Rajan, R.G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88, 559-586.

Staikouras, C., & Wood, G., (2004). The determinants of European bank profitability. International Business and Economics Research Journal, 3(6), 57–68.

Sufian, F., & Chong, R.R. (2008). Determinants of bank profitability in a developing country: Empirical evidence from the Philippines. Asian Academy of Management Journal of Accounting and Finance (AAMJAF, 4(2), 91-112.

Sudarini. (2005). Use of financial ratios in predicting profit on the future. Journal Akuntansi.Vol.XVI.No. 3. December.

Suryanto. (2015). Non-performing loans of the regional development bank in Indonesia and factors that influence this. Mediterranian Journal of Social Science, 6(4), 280-287.

Syamni, G., Musnadi, S., & Faisal. (2017). The prime lending rate and profitability of regional banks in Indonesia. Advance Science Letter, 23, 8044-8066.

Thakor, A. (1987). Asset writedowns: Managerial incentives and security returns: Discussion. Journal of Finance, 42, 661–663.

Uhomoibhi, T. (2008). Determinants of bank profitability: Macro economic evidence from Nigeria. (Working Paper, Deakin University).

Usman, B. (2003). Financial ratio analysis in predicting earnings changes in banks in Indonesia. Media Business Research and Management, 3(1), 59-74.

Vong, P.I., & Chan, H.S. (2009). Determinants of bank profitability in Macau. Macau Monetary Research Bulletin, 12(6), 93-113.

Werdaningtyas, H. (2002). Factors that affect the profitability of banking take-overs in Indonesia. (Master thesis, Universitas Diponogoro, Semarang, Indonesia).

Wijaya, R.D., & Sihombing, P. (2015). Determinants of bank profitability performance: CASE STUDY of a bank registered in Kompas index bank 100 year 2009-2012. Journal of Business Strategy and Execution, 7(2), 206-235.

Yanuardi, A., & Sumiati, D.H. (2014). Determinant factor for the profitability of banks listed on the Indonesian Stock Exchange. Journal of Accounting Multiparadigma JAMAL, 5(2), 170-274.



DOI: https://doi.org/10.22146/jieb.17331

Article Metrics

Abstract views : 13468 | views : 9602

Refbacks

  • There are currently no refbacks.


Bookmark and Share


Copyright (c) 2019 Journal of Indonesian Economy and Business

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Journal of Indonesian Economy and Business

Journal

Editorial Team
Focus and Scope
Peer Review Process
Publication Ethics
Screening for Plagiarism

Authors

Author Guidelines
Submission Guidelines
Online Submissions
Copyright Notice
Privacy Statement
Author Fees

Download

Author Pack
Submission Form & Manuscript Template

 

Reviewer

Reviewer Guidelines
Reviewer Acknowledgement

 

Reader

General Search
Achieves
Author index
Title index

 

 

The Journal of Indonesian Economy and Business (print ISSN 2085-8272; online ISSN 2338-5847) is published by the Faculty of Economics and Business Universitas Gadjah Mada, Indonesia. The content of this website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License
© 2019 Journal of Indonesian Economy and Business 
 Visitor Statistics