CHAPTER 2 THEORETICAL FOUNDATION 2.1 Bank Bank is one of a well-known financial institution in Indonesia. In general, bank is known as a place for people to save their money. It is a safer and better way to save money than keep it under the pillow. It is also known as a place for people to get loan in order to fulfill their needs. Based on article No. 7/1992 about banking which has changed by article No. 10/1998, bank is : Commercial institution which collect fund from people in form of savings and lend to their customer in form of credit or any other form in order to increase people welfare. According to the definition above, bank is an institution that provides saving and lending service to people in order to manage their fund. Bank also has several services in payment flow and money circulation. Bank generates its profit from the difference interest between savings and loans. Based on Based on article No. 13/1968, and confirmed in article No. 23/1999, Bank Indonesia is Indonesia s central bank. The other bank that operated in Indonesia could be group based on its function, its ownership, and its activity. In general, the activity flow of bank as an intermediary is shown below: people with excess fund people with lack fund FUNCTION Buy Giro Sell Loan Savings Deposits Image 2.1 Bank Activity 7
Based on its activity, bank in Indonesia is categorized as Bank Devisa, Bank Umum (Commercial Bank), and Bank Perkreditan Rakyat. Bank Devisa is a bank which is able to make a foreign exchange activity, such as L/C (Letter of Credit) and bank notes purchasing. Bank Devisa also has products that can support its activity in foreign exchange transactions, such as foreign exchange account or foreign exchange deposit. In Indonesia, state owned banks can be categorized as Bank Devisa, except Bank Tabungan Negara (BTN). Bank Umum (Commercial Bank) is a bank that do a all common banking activity such as saving and lending money, except foreign exchange transactions. This bank is un-allowed to have / do any foreign exchange transactions, and it is not that easy to transform into Bank Devisa because Bank Indonesia as a bank regulator in Indonesia has implemented some regulations about Bank Devisa requirements. There are a lot commercial bank in Indonesia such as Bank Ekonomi, Bank BPD, Bank Mayapada, etc. Bank Perkreditan Rakyat (BPR) is a bank which its activity to save and lend money to people, making accounts and deposits, and having banking products, except foreign exchange transactions and giro accounts. Similar with commercial bank, BPR can not have a foreign exchange transactions, it means that it may not has foreign exchange accounts. BPR also not serve giro account, so BPR can t issue check and Bilyet Giro (BG). While based on it s capital owner, bank is divided into state owned bank, private bank, foreign bank, and mixed-ownership bank. According to its name, state owned bank is bank which its capital is owned by the government. Private bank is bank which its capital is owned by local private sector. Foreign bank is bank which its capital is owned by foreign party. Usually it is a foreign bank that open branch office in Indonesia. While mixed-ownership bank is bank which its 8
capital is owned by both local or foreign party, whether the majority owner is the local party or foreign party. 2.2 Bank Performance Indicator Based on Peraturan Bank Indonesia Nomor: 6/10/PBI/2004 about Sistem Penilaian Tingkat Kesehatan Bank Umum, it is written that Bank performance indicator is result of qualitative assessment from various aspects which affect the condition or performance of a bank through quantitative or qualitative assessment against capital factors, asset quality, management, profitability (rentability), liquidity, and sensitivity to market risk. Quantitative assessment is the assessment of the position, progress, and projected financial ratios. While qualitative assessment is the assessment of factors that support quantitative assessment results, the implementation of risk management, and bank s complience. It is stated that quantitative assessment generated through financial ratios. Based on the previous line, the factors that being assessed in the assessment are capital, asset quality, management, profitability (rentability), and sensitivity to market risk. So the ratios that will come up in the assessment are capital ratios, earning asset ratios, rentability ratios, liquidity ratios, and compliance ratios. In this study, those ratios will be represented with one ratio, which are loan to deposit (LDR) ratio as a representative of liquidity ratios,, non performing loan (NPL) ratio as a representative of earning assets ratios, capital adequacy ratio (CAR) as a representative of capital ratios, and return on equity (ROE) ratio as a representative of rentability / profitability ratios. 2.2.1 Loan to Deposit (LDR) The liquidity ratio is represented by loan to deposit (LDR) ratio. Liquidity ratio is a measurement of company s ability to pay its short term debt. Higher value is better because it indicates a safety margin for the company to cover it s 9
short term debts. So the definition of LDR ratio will be almost similar with the liquidity ratio because LDR is a ratio to indicates the liquidity in the company (bank). Loan to deposit ratio is the amount of bank s loan divided by its deposits at any given time. LDR = (Equation 2.1) The higher the ratio is, the more bank have to rely on borrowed funds. If the value is too high, it means that the bank might not have enough liquidity to cover unexpected fund requirements. While if the value is too low it means that the bank is not earning as much as their potential. 2.2.2 Non Performing Loan (NPL) Basically, non performing loan is a term used for a loan that can t be paid by the Debitor whether they pay it longer than the time agreement or they even can not pay it at all and then runaway. As mentioned before, one of bank s job is as an intermediary between people has excess money and people who has lack of money, so bank is gathering people s money and then transform it into loan to other people. Some loan can not be paid back in time. Those loan called non performing loan. The formula of NPL : NPL = (Equation 2.2) Bank Indonesia as a bank regulator in Indonesia has determined that the maximum value of bank s NPL is 5%. Smaller value is preferred to be achieved because it means that the bank can take a good care of the loan they have given to the customer. While bigger value means that the bank has to prepare the 10
allowance for doubtful accounts which will siphon profits and liquidity clogged up. 2.2.3 Capital Adequacy Ratio (CAR) It is a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures. In a simple formulation, a bank's capital is the caretaker for potential losses, which protects the bank's depositors or other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system. Thus, the bank regulator / central bank determined the minimum value of CAR, which in Indonesia the CAR minimum value that determined by Bank Indonesia is 12%. If a bank is having a smaller CAR value, it means that the bank has a bad capital management. While if it is too big, it is not good either because it means that the bank didn t use the capital effectively. The formula of CAR (Equation 2.3) In calculating CAR, there are two capital involved, which are Tier 1 Capital and Tier 2 Capital. Tier 1 Capital is the capital which can absorb losses without a bank being required to cease trading. Tier 1 Capital also known as core capital. Core capital consist of paid-up capital and additional capital reserves. Tier 2 Capital is the capital which can absorb losses in the event of winding-up and so provides a lesser degree of protection to depositors. Tier 2 Capital also known as supplementary capital. This supplementary capital consist of general reserves of allowance, PPAP for possible losses on earning assets, reserves of fixed assets revaluation, loan capital, and subordinated loan. 11
2.2.4 Return on Equity (ROE) Return on equity is a part of profitability or rentability ratios. It is a ratio to measure the bank s efficiency in generating profit through its shareholders equity, or sometimes called as net assets. ROE = (Equation 2.4) Bigger ROE value is better, because it means that the bank can maximize the equity potentials and turn it into profits. 2.3 Statistic Analysis 2.3.1 Regression Analysis The regression analysis that used in this study is multiple linear regression, with regression model: Y = α + β1x1 + β2x2 + β3x3 Where Y = return (ROE) X1 = LDR X2 = NPL X3 = CAR α = Constanta β1 = LDR coefficient β2 = NPL coefficient β3 = CAR coefficient 12
The assumptions test is to use the assumptions of linear regression which are: The time series data is stationer Y value must be followed normal distribution There is no multicollinearity in the regression There is no heteroscedasticity in the regression There is no autocorrelation in the regression 2.3.1.1 Stationary Test In time series analysis, the stationarity of data set is important. When we are going talk about the relationship between economic variable, we need to considered about the stationarity of the data set, because un-stationary data set will create spuriuos data. (Sanjoyo:2009). Stationarity test can be done with several test: Graph Analysis : if the means and varians of the data set is constant, the data set is stationary ACF (Auto Correlation Function) : if the graph shows autocorrelation, it means that the data set is not-stationary Unit Root Test : Dickey Fuller (DF), Augmented Dickey Fuller (ADF), and Phillips-Perron (PP) test. The author use ACF test to determine the stationarity of the data set in this study. 13
2.3.1.2 Normality Test The graph analysis and Skewness and Kurtosis analysis used in this study is to test the normality. From the graph if the data is normally distributed, a diagonal line will formed and plots are spread around the line by following the direction of the line. 2.3.1.3 Multicollinearity Test Multicollinearity test is used to examine whether there is a high correlation among independent variables or not. If the correlation among independent variables is too high, then the standard error will be too high and the regression coefficients cannot be estimated properly. This study used Variance Inflation Factor (VIF) as the indicator of multicollinearity existance. Multicollinearity exist if the VIF value > 10. 2.3.1.4 Heteroscedasticity Test Heteroscedasticity occur when the residual doesn t have constant variance, while regression demanding constant variance (homoscedasticity). If the heteroscedasticity occur, the regression model s validity is in doubt. It can be seen from the P value, which is in the Sig. column in SPSS. When the P value is higher than the degree of significance of 0.05 so the regression model contain no heteroscedasticity. 2.3.1.5 Autocorrelation Test Autocorrelation test is used to test whether there is a correlation between the error term of t period (particular period) with t-1 period (other period) in regression model. If the correlation exist, means there is an autocorrelation problem in the regression model. The Durbin - Watson (d) test is used to test the autocorrelation existence, with the hypothesis: 14
H0 : no autocorrelation found H1 : autocorrelation found Where: H 0 Decision If No positive autocorrelation Reject 0 < d < dl No positive autocorrelation No Decision dl d du No negative autocorrelation Reject 4 - dl < d < 4 No negative autocorrelation No Decision 4 - du d 4-dL No positive nor negative correlation Accept dl < d < 4 - du 2.3.2 Hypothesis testing Hypothesis testing is used to analyze the effect of the independent variables to the dependent variable. In hypothesis testing we look at R, R-squared, the t-test, and the F test. 2.3.2.1 R R value shows how much the correlation between the dependent and the independent variable. The closer R value to 1 explain a strong correlation between those variables 2.3.2.2 R-squared R 2 value shows how much the dependent variable can be explained by the independent variable. The closer R 2 value to 1 the better is the fit of the model, vice versa. 2.3.2.3 t-test The t-test is about whether the independent variable partially has significant effect to the dependent variable or not. If the significance value (from sig. table) is smaller than the degree of significance, which is 0.05 in this study, then the null hypothesis is accepted where H0 : there is no significant effect. 15
2.3.2.4 F Test The F Test is used find whether there is simultaneous significance effect of the independent to the dependent variable or not. This test can be tested from the ANOVA table. If the significance value (in Sig. column) is bigger than the degree of significance of 0.05, then the null hypothesis is accepted where H0 : there is no simultaneous significant effect. 16