Financial Indicators And Its Implications On Profitability Of Soe Banks In Indonesia

Abstract

This research aims to measure operational and financial performance, and how it affects the profitability of state-owned banks “BUMN” in Indonesia. Profitability is related to the soundness of the banking system in running its business units. We investigate Capital Adequacy Ratio (CAR), Loan to Deposit Ratio (LDR), Net Interest Margin (NIM) and Operational Efficiency Ratio as antecedent factors of Non-Performing Loans (NPL), and then NPL can directly affect profitability. The research method used to calculate the hypothesis in this research is the financial ratios of state-owned banks “BUMN” from 2012 to 2021. The research method used to measure financial ratio data is carried out using a structural equation modeling analysis technique through partial least squares. We have tested the second order confirmatory factor analysis by considering CAR, BOPO, LDR, and NIM as constructs reflective of NPL. The research results are expressed in two findings. First, CAR, BOPO, LDR, and NIM can be early indicators to identify possible NPLs. If these indicators are not managed properly by the bank, then the bank may experience a lack of capital, low liquidity, high operational costs, and/or low income, which can lead to NPLs. The second finding shows that NPL is a dual construct that is enabler and process, which means that NPL is the dominant factor affecting profitability, and at the same time NPL occurs due to the inability of banks to analyze, manage and monitor credit risk. The limitation in this study is the limited time to look at the various factors that cause NPLs, such as economic, social and political situations that cannot be controlled by the bank.