THE DETERMINANTS OF COMMERCIAL BANK PROFITABILITY IN INDONESIA

Abstract

1. This paper seeks to examine the determinants of bank profitability in Indonesia. The sample used is a panel data of 25 publicly traded Indonesian commercial banks in 2007-2012 period. This research used Return on Assets (ROA) and Return on Equity (ROE) as proxies of profitability and analyze how variables from three categories that is internal, external, and market share variable affects them. We found some intriguing findings from this study, namely, the effect of CAR that we found to be negative towards profitability,which indicated that the capitals of Indonesian banks are beyond their optimal level. Then we found that Loan to Deposit ratio and Market Share of Credit, contrary to common sense, also demonstrated a negative effect, which appears to be caused by the 2008-2010 Global Financial Crisis. Last, we also found that Inflation positively affect profitability, which seemingly caused by a demand-pull type of inflation.