Determinants of Indonesian Banking Profitability

This study aims to investigate determinants of Indonesian banking profitability. The determinants of banking profitability are bank specifics and macroeconomic indicators. This study uses balanced panel data involving 18 banks in Indonesia for the period 2009-2019. The research method used is panel regression method. Empirical findings indicate that bank specifics, such as bank liquidity and capital, have a positive and significant effect on banking profitability, while the cost-to-income ratio and leverage has a negative and significant effect on banking profitability. Macroeconomic indicators, such as interest rates boost bank profitability. On the other hand, the results of this study indicate that the exchange rate reduces profitability. This study also reveals that credit risk, inflation and GDP have no significant effect on profitability. The results of this study have considerable implications for policy. The government needs to regulate inflation, exchange rates, and interest rates. Policy makers need to increase bank liquidity and capital to increase banking profitability. Furthermore, policy makers need to regulate efficiency related to the cost-to-income ratio. The lower the cost-to-income ratio, the higher the profitability. This study is a unique investigation into the Indonesian banking industry that considers the simultaneous effects of bank specifics and macroeconomic indicators on banking profitability. The results of this study can help policy makers, governments, bankers, and bank managers to better understand the various determinants of bank profitability. Keywords: Bank specifics; Macroeconomic; profitability; Indonesian Banking; Panel regression 18