CHAPTER 1 INTRODUCTION. On July 16th 2010, Media Indonesia wrote about the profit of Bank BTN.

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1 CHAPTER 1 INTRODUCTION 1.1 Background On July 16th 2010, Media Indonesia wrote about the profit of Bank BTN. This news is stated by the Director of Bank BTN itself, Mr. Iqbal Latanro. He said that the net profit of Bank BTN in this first semester in 2010 reached IDR billion. One thing that caused this is the loan that reach IDR trillion. The good performance is not only shown by the increase of profit and loan, but also the third party fund. For the third party fund, it is recorded for IDR billion. He also said that though the loan is increasing, but they can keep maintaining the good NPL at 3.4%. In other financial ratios Bank BTN also show good performance, like it is stated in the CAR value which is 18.71% in the first semester of Basically, bank is an intermediary institution that connect people with excess fund to people with lack of fund. Bank gathered fund from people in form of giro accounts, savings, or deposit which later giving it back to other people in form of loan. From that activity, bank is generated profit from the difference between saving and loan interest that has given to people so that bank s management must be based on trust and prudent. If bank is not trusted by people, then people won t put their money in it and bank won t get any third party fund, and if bank is careless in giving loan to people then the loan may not be paid back that can lead bank into bankruptcy. So in order to gain a maximum profitability, bank must have a good quality loan with low cost of fund. To find out the quality of loan that has been given to people by bank, an NPL indicator is used. NPL is non performing loan ratio. The smaller NPL value means the better bank managing its loan, so the bank gets more profit from the loan released. In the other side to see the effectivity of third party fund, LDR ratio 1

2 can be used. LDR ratio is the proportion between the loan that have been released to the available third party fund. Better LDR value means that the bank has maximized its fund s potential to generate profit. In order to make a loan expansion, CAR value is need to be concerned too. CAR (Capital Adequacy Ratio) is a proportion between bank s equity to the risk weighted asset. In this equity, there is allowance to cover non performing loan. If the CAR loan is not sufficient, then the third patry fund that will be used to cover that non performing loan, so it is feared that the bank can not paid back the fund because basically third party fund is bank s liability to the customer. Therefore, Bank Indonesia as Indonesia bank regulator stated that the minimum value for CAR is 12%. Good CAR value also indicates that bank has a sufficient capital to give loan to people, that bank can manage itself well. So to see the bank s performance in general especially in generating profit, which is usually indicated from return on equity (ROE), the LDR, NPL, and CAR value can be used as indicator. As stated by Iqbal Latanro about profit of Bank BTN, the third party fund is in a good condition with big value. This situation is utilized for loan expansion that turned out to be profit. The loan expansion has lead BTN to increased of loan that supported with 3.4% NPL and 18.71% CAR. In the end, the loan expansion generate profits to billion. We can see that good LDR, NPL, and CAR can lead to a good profitability. So this final project will discuss about the effect of LDR, NPL, and CAR to ROE in five biggest bank in Indonesia from year 2004 to

3 1.2 Problem Identification What happened in Bank BTN is that loan expansion can generate profit. Those things can be figured from its asset, LDR, NPL, and the CAR of the bank. It is shown that when the ratios changes, the profit is changed too. The loan expansion that has been done by BTN is maximizing the third party potential to generate profit. To see how effective the third party fund that already transformed into loan LDR can be used as indicator. In theory, more third fund transformed into loan, the more profit that can be generated. Then the NPL ratio that shown by BTN which is 3.4% where that value is considered good from the amount of loan released. NPL is a comparison between the non performing loan to the total loan that given to people. Non performing loan is a loan where customer can not paid it back at all, it can lead bank to loss because the invested fund can not generate profit. Actually bank has allocated allowance to cover this non performing loan with specific weight that allocated in the capital. But if the NPL spikes up, the third party fund might be used to cover it and it can lead to bankruptcy. Therefore, small NPL value is preferred, or it can be said that NPL has negative relation to return. The last ratio that connected to profit is CAR. In the article about Bank BTN, it is stated that the CAR value is good at 18.71% point. CAR is a proportion of capital to risk weighted asset. Good CAR value indicates that the bank has a sufficient capital to give loan to people, which is not only from the third party fund, so that the bank can manage them self well. Therefore Bank Indonesia as Indonesian bank regulator declared a minimum value for CAR which is 12%. Based on the lecturing material of Kartika Sari, Instructor of Banking Application Audit Course Gunadarma University (2005), ROE (Return on Equity) is one ratio that can describe bank s profitability. ROE is the ratio between the net profit and equity, it means that how many profit that can be generated from the 3

4 equity. Based on previous exposure, there is a relation between LDR, NPL, and CAR to ROE. The problem identification of this study is: what is the effect of LDR, NPL, and CAR to ROE? 1.3 Objective The objective of this study is to analyze the effect of loan to deposit ratio (LDR), non performing loan (NPL), and capital adequacy ratio (CAR) to return on equity (ROE) of the five biggest banks in Indonesia banking industry based on its assets. These ratios are chosen based on Peraturan Bank Indonesia Nomor 6/10/PBI/2004 tanggal 12 April 2004 about bank s performance indicator. 1.4 Scope The scope of this study is focused on loan to deposit ratio (LDR), non performing loan (NPL), capital adequacy ratio (CAR), and return on equity (ROE) of the five biggest bank in Indonesia based on its asset which are Bank Mandiri, Bank BCA, Bank BNI, Bank BRI, and Bank Danamon. The data is gathered from those five banks financial report in 6 years period (2004, 2005, 2006, 2007, 2008, Report Outline This study is reported as follows: CHAPTER 1 : INTRODUCTION This chapter contains the background, problem identification, scope, and objective of this final project. CHAPTER 2 : THEORETICAL FOUNDATION This chapter discusses the theories related to the study, which are bank definition, bank performance indicator, loan to deposit ratio (LDR), non 4

5 performing loan ratio (NPL), capital adequacy ratio (CAR), and return on equity ratio (ROE). CHAPTER 3 : METHODOLOGY Discuss the step used for the research. The data collection and expected outcome are included in this chapter. CHAPTER 4 : ANALYSIS Present the analysis, findings, and output of this study. This chapter will contain the loan to deposit ratio, non performing loan ratio, and capital adequacy ratio analysis of the research object for 6 years for all the five banks, it is also contain the correlation of how those ratios effecting the bank s profitability (ROE). CHAPTER 5 : CONCLUSION AND RECOMMENDATION This chapter will analyze the five banks performance and how the ratios effect the return. This chapter also contain the recommendation for the bank and for further research. 5