DOMESTIC AND FOREIGN BANK PROFITABILITY: PANEL EVIDENCE ON BANK-SPECIFIC AND MACROECONOMIC DETERMINANTS IN INDONESIA

Abstract

This paper is conducted to compare the determinants of profitability of the domestic and foreign banks operating in Indonesia. The Random Effect Model is employed with balanced panel data on 27 commercial banks, using quarterly data for the period of 2010 to 2010. In order to find out the differences in the profitability determinants, the sample of banks is divided into two sub-samples based on share ownership (domestic and foreign). The bank-specific determinants such as Capital Adequacy Ratio (CAR), Loan to Deposit Ratio (LDR), Non Performing Loan (NPL), Cost to Income Ratio (CIR), Loss Provision (LP) and also from macroeconomic determinants (NIM sensitivity to GDP, and NIM sensitivity to Inflation) employed simultaneous and individually toward Profitability which is proxied by Return on Asset (ROA). The results reveal that the profitability determinants of domestic banks are not much different from the determinant factors of foreign banks, namely Cost-to-Income Ratio and Loss Provision, meanwhile the other variables are not able to explain the variability of domestic and foreign banks’ profitability. However, the Loss Provision variable indicates the different sign of significance, which means that there are differences in the behavior of banks in obtaining their income and managing their credit risk. In other side, the average intercept and explanatory power of the model of domestic banks is higher for than foreign bank, which shows that the profitability of domestic banks are better than foreign banks