Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Analyzing Determinants of Bank Performance in
Indonesia (Case Study: 19 Big Banks Period
2008-2013)
Nita Nofita R1 and Achmad Herlanto Anggono2
Bank takes big role toward economic growth in a country. The
operation of a bank can determine the decision of investment.
In order to evaluate bank performance, this research will use
efficiency perspective. Thus, this issue becomes important
since bank inefficiency can lead to bankruptcy. This study
aims to analyze determinants affecting bank performance
through efficiency perspective.Case study for this research
are 19 big banks in Indonesia within period of 2008-2013.
The result from this study will provide the affecting
determinants and representation of bank performance in
Indonesia.
Keywords: Performance, Bank Efficiency, Banking, Intermediation
.
Field of Research: Finance, Banking
1. Introduction
As the intermediaries institution, bank takes big role in the circulation of
money in a country. The operation of a bank relates to country’s economic.
This phenomenon is expected can lead to a better investment decision. With
that consideration, the issue of bank efficiency becomes very important since
the inefficiency can lead to bankruptcy (Rozzani & Rahman, 2013). According
to Indonesian Banking Statistics (2013), there was an indication of
performance depression in banking industry, in first quarter 2013. It caused by
uncertainty of global crisis completion that affected the decrement of
commodity demand. On the other hand, this occurrence has weakened the
credit growth. It was proven by declining of Return On Asset to 3.08% in
December 2013. Moreover, Net Interest Margin was also decreasing from
5.49% in December 2012 to 4.89% in December 2013 (Otoritas Jasa
Keuangan, 2013).
The decrement of Return On Asset and Net Interest Margin was not a good
sign for financial performance. In accordance with that, this phenomenon
could be indicating a decrement of bank efficiency if Like Return On Asset,
Return On Equity is one of financial ratio that represent bank performance.
Both of them attempt to figure out the ability of a bank in generating profit.
1
Nita Nofita R, School of Business and Management, Institut Teknologi Bandung, Indonesia
Email : nita.nofita@sbm-itb.ac.id
2
Ir. Achmad Herlanto Anggono, MBA. , School of Business and Management, Institut Teknologi
Bandung, Indonesia. Email : achmad.herlanto@sbm-itb.ac.id
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Figure 1. Trends in ROA and ROE during 2008-2013
Source : Quarterly financial report, Bank Indonesia (calculated)
The statistical data above shows the average of ROA and ROE of big banks
in Indonesia during 2008-2013. The ROE tends to be inconsistent, in
December 2009 ROE is 16.76% and goes up gradually to 19.89% in March
2010. However, it decreases to 17.89% in June 2011 and goes up again to
19.10% in December 2012. This trend motivates the author to analyze bank
performance in Indonesia through efficiency perspective. The objective of this
research is to figure out how are big banks performance in Indonesia and
examine the determinants that significantly influence bank performance in
Indonesia through efficiency perspective. This paper will have four sections
while the first one is the introduction then section 2 is the literature review and
empirical theory that relate to the topic of the research as the framework of
the analysis. Section 3 will provide brief explanation about the steps to
perform this research and data formulation. Last section provides the result of
data calculation that will be discussed in comprehensive analysis and
interpretation.
2. Literature Review
2.1 Bank
According to Apostolik et.al (2009), bank has three main activities that consist
of deposit collection, payment service, and loan underwriting. Deposit
collection could be interpreted as the activity of bank to collect fund from
society as demand deposit, saving deposit, and time deposit. Payment
service focus on transfer process while loan underwriting focus on circulate
the fund that has been gathered to society as credit or loan. Saunders (2008)
classified bank into four function as the intermediary, which are as broker, as
asset transformer, as delegated monitor, and as information producer.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
BANK
Collect Fund
Circulate Fund
Other
Services
id
il
Fee
Spread
Based
Fee Based
Figure.2 Financial Management of Bank
Source: Adopted from Dasar-dasar Perbankan Edisi Revisi (Kasmir, 2012)
Chart above can give better illustration of bank intermediary function. Kasmir
(2012) illustrate that profit of a bank can be obtained from the interest
differences, called as spread based. This profit system only valid for
conventional banks, otherwise sharia bank has different illustration of
intermediary function. In addition, bank also receive another profit from
service activities, called as fee based.
Based on Bank Indonesia Regulation number 14/26/PBI/2012, in conducting
the business activity, bank should operate in accordance with bank’s capacity.
Hence, bank is expected to have better resilience and be more efficient.
According to the core capital, bank activities are classified into 4 namely,
Business Activity Commercial Bank or BUKU (Bank Indonesia, 2012).




BUKU 1 : Basic banking services with core capital at min. IDR
100billion-below 1 trillion
BUKU 2 : Wider business activity and limited equity with core capital at
min. IDR 1trillion-below 5 trillion
BUKU 3 : Having full of business activity and equity with core capital at
min. IDR 5 trillion-below 30 trillion
BUKU 4 : Having full of business activity and wider equity with core
capital at min. IDR 30trillion
This research will focus on big commercial banks in Indonesia that classified
in BUKU 3 and 4.
2.1.1 Bank Performance
The activity of a bank is unpredictable, there would be so many factors that
affect bank activity. From time to time, bank is not always show the same
performance. Hence, in periodically bank do the analysis toward bank
performance. It is intended to evaluate bank condition at that time and ease
the management to make business strategy decision in the future.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
2.1.1.1 Financial Ratio
As mentioned before, bank periodically make financial report to evaluate bank
performance, since there are too many informations, financial ratio becomes
an indicator that help management in evaluating for the whole performance.
Beside, it is very useful for external party who attempt to figure out bank
performance, such as investor and government. The following financial ratios
are the choosen ratio that will be used in this research:
ROA
ROA stands for Return On Asset. It is the ratio that represent the
ability of a bank to generate profit by utilizing total asset. ROA is
net income divided by assets.
ROE
ROE stands for Return On Equity. It indicates the ability of a bank
to return the income as shareholder equity. ROE is net income
divided by commonstock equity.
CAR
CAR stands for Capital Adequacy Ratio. (Bank Indonesia, 2010)
CAR is the ratio of capital to risk weighted asset as set forth in the
regulation on capital adequacy ratio for commercial banks.
DER
DER stands for Debt Equity Ratio. It is the proportion of a bank in
financing the assets whether using liabilities, shareholders equity,
or both. This ratio is long-term debt divided by equity.
LDR
LDR stands for Loan to Deposit Ratio. (Bank Indonesia, 2010) LDR
is the ratio of loan extended to third parties in Rupiah and foreign
currencies, excluding loan to other banks, to third party funds
covering demand deposits, savings, and time deposits in Rupiah
and foreign currencies, excluding interbank funds.
NPL
NPL stands for Non-Performing Loan. This ratio represent amount
of credit that can not be paid by the borrower, called as default
credit. There are five classification for credit which are liquid, in
special attention, substandard, doubtful, and loss. NPL is the
calculation of substandard, doubtful, and loss credit divided by total
credit.
NIM
NIM stands for Net Interest Margin, considered as a fee for bank
that obtained by circulating fund to society. NIM is Net Interest
Income divided by Average Earning Asset.
BOPO
BOPO defines whether a bank has already efficiently optimize all
production factors or not. BOPO is operating expense divided by
operating income.
MSTAR
MSTAR is the ratio of market securities to total asset ratio.
Securities include the amount of measured at fair value through
profit and loss, available for sale, hold to maturity, and securities
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
loan and receivable. The securities include amount in rupiah and
foreign currencies.
LTAR
LTAR is the ratio of total loan to total asset. The credit include loan
in rupiah and foreign currencies.
ITAR
ITAR is impairment on financial asset to total asset ratio. The
impairment include allowance for interbank placement at other
banks, for securities held, securities purchased under age
agreement to ressel, derivative asset, credit extended, acceptance
asset, equity participation.
2.1.1.2 Bank Efficiency
According to Mlima & Hjalmarsson (2002), there are two approaches to
measure efficiency. First, production approach that use physical perspective
such as labor and capital to produce financial services. Second,
intermediation approach that use financial fund as the input factors.
Intermediation approach is classified into two sub-group, which are profit by
evaluating all types of cost and income generated in production process, and
risk management by evaluating risk in various bank’s asset. Regarding to
previous study, this research will use intermediation approach. Therefore, this
research will use five inputs and four outputs to examine bank performance
through efficiency perspective. Those variables will be examined through
ROA and ROE as dependent variables that indicate the ability of bank in
generating profi. Input factors will include CAR, DER, LDR,LTAR, and ITAR.
Otherwise, output factors will include NPL, NIM, BOPO, and MSTAR.
3. Methodology
3.1 Data Collection
This research use secondary quantitative data that obtained from Bank
Indonesia. Those data include quarterly financial report, income statement,
and balance sheet. Sampe for this research involve 19 commercial banks in
Indonesia that classified in BUKU 3 and 4 in period of 2008-2013.
3.2 Data Analysis
In investigating bank performance, the author will use regression analysis to
examine all variables. Due to using regression analysis, first, the author
should do classical linear assumption test in order to make sure this research
has good assumption. Classical linear assumption test for this research
involve normality test, heteroscedasticity test, autocorrelation test, and
multicollinearity test. Those test will be examined through Eviews 8 Program.
Second, after analyze the assumption of the research then all variables will be
examined. The following figure is the proposed model to analyze bank
performance through efficiency perspective:
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Figure 3. Proposed Model For Determinants Analysis
There are two dependent variables that will be used in this research. So that,
the regression will be examined for two times. First, using ROA as dependent
variable and second is using ROE as dependent variables. Through the
following equations, the author attempt to examine the influence of those
variables toward ROA and ROE, as the representation of bank performance.
(1)
Hypothesis through ROA :

ROA (Y1) is dependent variable

CAR (X1) is independent variable
H0 : β = 0, X1 has no significant positive effect toward Y1
H1 : β ≠ 0, X1 has significant positive effect toward Y1

DER (X2) is independent variable
H0 : β = 0, X2 has no significant negative effect toward Y1
H1 : β ≠ 0, X2 has significant negative effect toward Y1

LDR (X3) is independent variable
H0 : β = 0, X3 has no significant negative effect toward Y1
H1 : β ≠ 0, X3 has significant negative effect toward Y1

NPL (X4) is independent variable
H0 : β = 0, X4 has no significant positive effect toward Y1
H1 : β ≠ 0, X4 has significant positive effect toward Y1
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0

NIM (X5) is independent variable
H0 : β = 0, X5 has no significant positive effect toward Y1
H1 : β ≠ 0, X5 has significant positive effect toward Y1

BOPO (X6) is independent variable
H0 : β = 0, X6 has no significant negative effect toward Y1
H1 : β ≠ 0, X6 has significant negative effect toward Y1

MSTAR (X7) is independent variable
H0 : β = 0, X7 has no significant positive effect toward Y1
H1 : β ≠ 0, X7 has significant positive effect toward Y1

LTAR (X8) is independent variable
H0 : β = 0, X8 has no significant positive effect toward Y1
H1 : β ≠ 0, X8 has significant positive effect toward Y1

ITAR (X9) is independent variable
H0 : β = 0, X9 has no significant negative effect toward Y1
H1 : β ≠ 0, X9 has significant negative effect toward Y1
(2)
Hypothesis through ROE :

ROE (Y2) is dependent variable

CAR (X1) is independent variable
H0 : β = 0, X1 has no significant negative effect toward Y2
H1 : β ≠ 0, X1 has significant negative effect toward Y2

DER (X2) is independent variable
H0 : β = 0, X2 has no significant positive effect toward Y2
H1 : β ≠ 0, X2 has significant positive effect toward Y2

LDR (X3) is independent variable
H0 : β = 0, X3 has no significant negative effect toward Y2
H1 : β ≠ 0, X3 has significant negative effect toward Y2

NPL (X4) is independent variable
H0 : β = 0, X4 has no significant negative effect toward Y2
H1 : β ≠ 0, X4 has significant negative effect toward Y2

NIM (X5) is independent variable
H0 : β = 0, X5 has no significant positive effect toward Y2
H1 : β ≠ 0, X5 has significant positive effect toward Y2

BOPO (X6) is independent variable
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
H0 : β = 0, X6 has no significant negative effect toward Y2
H1 : β ≠ 0, X6 has significant negative effect toward Y2

MSTAR (X7) is independent variable
H0 : β = 0, X7 has no significant positive effect toward Y2
H1 : β ≠ 0, X7 has significant positive effect toward Y2

LTAR (X8) is independent variable
H0 : β = 0, X8 has no significant positive effect toward Y2
H1 : β ≠ 0, X8 has significant positive effect toward Y2

ITAR (X9) is independent variable
H0 : β = 0, X9 has no significant positive effect toward Y2
H1 : β ≠ 0, X9 has significant positive effect toward Y2
4. The Findings
4.1 Bank Performance Through ROA
In this research, the procedure to examine bank performance through ROA
consist of two steps. First procedure define whether the assumption of the
research can be accepted or not. If the assumption is rejected, the
assumption should be changed before continuing to the next procedure. The
result of assumption analysis is as follow:
Normality Test
90
Series: Residuals
Sample 1 456
Observations 456
80
70
60
50
40
30
20
10
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
-1.10e-15
-0.032188
2.870754
-2.413984
0.663202
0.557385
5.467973
Jarque-Bera
Probability
139.3384
0.000000
0
-2
-1
0
1
2
3
Figure 4.1 Normality Test through ROA
The histogram graph above form a bell-shaped that indicate the data is
normally distributed. Normality test is one of prerequisite before doing
regression analysis. Normality also can be known by comparing Jarque-bera
value with Chi-square.
Heteroscedasticity Test
This research use white-test to analyze the indication of heteroscedasticity.
The data will meet the requirement if only has constant var (ui), called
homoscedasticity. By comparing Obs*R-squared value with significant level at
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
0.05, there is no heteroscedasticity in this research. The value of Obs*Rsquared for this research through ROA as dependent variable is 82.17777.
Autocorrelation Test
This research use Breusch-Godfrey Test to in order to detect the
autocorrelation among variables. By comparing Obs*R-squared value with
significant level at 0.05, there is no indication of autocorrelation among
variables. The value of Obs*R-squared for this research through ROA as
dependent variable is 202.7182.
Multicollinearity Test
By using Pair-wise Test, this research indicates no multicollinearity.If the
result of Pair-wise test exceeds 0.8 then it indicates multicollinearity and the
variable should be omitted to have good result in regression analysis.
After following those procedures, the data is qualify to be continued in
regression analysis as the second procedure. The result of coefficient
determination indicates 82.189% of ROA has been defined by those
independent variables. By using t-Test, known that NIM and MSTAR has
positively significant influence toward ROA while BOPO and DER has
negatively significant significant influence. Otherwise, CAR, NPL, and LTAR
has positive but no significant influence, also LDR and ITAR has negative but
no significant influence toward ROA. As the result of F-test in regression
analysis, all independent variables have jointly significant influence toward
ROA.
4.2 Bank Performance Through ROE
The author will follow the same procedures to analyze bank performance
through ROE.
Normality Test
90
Series: Residuals
Sample 1 456
Observations 456
80
70
60
50
40
30
20
10
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
-4.09e-15
0.573343
17.56161
-24.86145
5.460987
-0.527446
4.328956
Jarque-Bera
Probability
54.69954
0.000000
0
-25
-20
-15
-10
-5
0
5
10
15
20
Figure 4.2 Normality Test through ROE
Graph above indicates that the data is normally distributed. Chi-square value
at 496.236 is also prove the occurence of normal distribution.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Heteroscedasticity Test
Obs*R-squared for this test is 44.06208 with significant level at 0.05. This
result indicates homoscedasticity for the research.
Autocorrelation-Test
The value of Obs*R-squared for this research through ROA as dependent
variable is 243.9980
Multicollinearity-Test
For the research through ROE has no indication of multicollinearity due to the
results of pair-wise test are smaller than 0.8.
To sump up the regression analysis, ROE has been defined about 80.4904%
by independent variables. Known that, NIM and MSTAR has positively
significant influence toward ROE while CAR, LDR, and BOPO has negatively
significant significant influence. Otherwise, DER, LTAR, and ITAR have
positive but no significant influence, and NPL has negative but no significant
influence toward ROE. As the result of F-test in regression analysis, all
independent variables have jointly significant influence toward ROE.
5. Summary and Conclusions
With This research found that NIM and MSTAR are positive significant toward
ROA, but BOPO and DER are negative significant. On the other hand, CAR,
NPL, and LTAR are positive but no significant toward ROA. Also, LDR and
ITAR are negative but no significant toward ROA. ROA is constant at
3.341707 without any influence from independent variables. Among of 9
independent variables, NIM is the most significant with 0.229436 increasing
ROA.
This research also found that NIM and MSTAR are positive significant toward
ROE, but CAR, LDR, and BOPO are negative significant. On the other hand,
DER, LTAR, and ITAR are positive but no significant toward ROE. Moreover,
NPL is negative but no significant toward ROE. ROE is constant at 19.66291
without any influence from independent variables. Surprisingly, NIM is also
the most significant variable with 1.695646 increasing ROE.
In short, bank should maintain interest margin carefully. According to this
research, Net Interest Margin Ratio become the most significant variable that
influence bank performance. When bank can not maintain interest margin, it
will affect the decrement of profit and also will affect investors’ decision.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
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