Optimal Composition of the Indonesian Listed Banks’ Earning Assets and the Effects on Their Market Capitalization Does It Matter?
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Published:
May 28, 2019
Keywords:
Bank Indonesia Bank of International Settlement, Indonesian Stock Exchange earning assets market capitalization net interest margin loan-to-deposit ratio
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Abstract
Even though it is beneficial for banks to generate the highest net interest margin at the lowest risk for optimality sake, in reality bankers and finance professionals have varied in their management style for earning assets. The general aim of the banking sectors is to generate the best net interest margins that lead to a satisfactory market capitalization level, particularly in compliance with the risk mitigation instructions issued by Bank Indonesia. Non-parametric statistical analysis was applied to secondary data obtained from the Financial Services Authority and Bank Indonesia (2012–2014). It was concluded that the loan-to-deposit ratio was not dependent on the optimal earning assets composition, even though the latter correlated with the listed Indonesian banks’ market capitalization. Market capitalization is the ultimate achievement goal for all listed banks. As a result of this study, it is recommended that the Financial Service Authority and Bank Indonesia should further regulate optimal earning assets composition, in addition to prudent management of the banking system’s assets and liabilities.
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Research Articles
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References
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Treynor, J. (1961, August 8). Market value, time, and risk. Retrieved from https://ssrn.com/abstract= 2600356 or http://dx.doi.org/10.2139/ssrn.2600356
Trinugroho, I., Agusman, A., & Tarazi, A. (2012). Why have bank interest margins been so high in Indonesia since the 1997/1998 Financial Crisis? Research in International Business and Finance, 32, 139–158. Retrieved from https://doi.org/10.1016/j.ribaf.2014.04.001
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Wagner, W. (2009). Efficient asset allocation in the banking sector and financial regulation. International Journal of Central Banking, 5(1), 75–95. Retrieved from https://www.ijcb.org/journal/ijcb09q1a3.pdf
Bank Indonesia (2004). Bank Indonesia circular letter No. 6/10/PBI/2004 SK amending SK direksi Bank Indonesia No. 30/277/KEP/DIR. Rating system for commercial banks. Retrieved from https://www.ojk.go.id/Files/ 201402/pbi061004_eng_1392973162.pdf
Bank Indonesia (2011). Bank Indonesia circular letter No. 13/23/DPNP. Amendment to circular letter No. 5/21/DNP concerning risk management implementation for commercial banks. Retrieved from https://ojk.go.id/en/ kanal/perbankan/regulasi/surat-edaran-bank-indonesia/Pages/circular-letter-number-13-23-dpnp.aspx
Barth, M., Beaver, W., & Wolfson, M. (1990). Components of earnings and the structure of bank share prices. Financial Analysts Journal, 46(3), 53–60.
Brady, M. (2017). Keynes on uncertainty and his IS-LM Model in the 1937 Quarterly Journal of Economics reply: There never was any conflict between Keynes’ definition of uncertainty and Keynes’ IS-LM Model. Social Science Research Network. Retrieved from http://dx.doi.org/10.2139/ssrn.2992154
Choueifaty, Y. (2010). Diversification and the inefficiency of market cap portfolio. VBA Journal, 1, 26–33. Retrieved from https://www.tobam.fr/wp-content/uploads/2015/01/2010-04-Div-Mkt_Cap_Inefficiency_04.2010.pdf
Corielli, F., & Meucci, A. (2003). Bayesian asset allocation. Studi Statistici, N.76, Instituto di Metodi Quantitativi, Università L.Bocconi, Milano. Retrieved from http://www.certet.unibocconi.it/wps/allegatiCTP/studistat. n.76.pdf
Diether, K. (2012). Mean variance analysis. Fisher College of Business. Retrieved from https://www.coursehero. com/file/13245185/Portfolio-risk/
Fisher, R., & Rosenblum, H. (2013). A credible path for ending too big to fail. Business & Economics Journal, 48(3), 167–173. Retrieved from https://www.jstor.org/stable/23491698?seq=1#page_ scan_tab_contents
Gong, D., Huizinga, H., and Laeven, L. (2018). Nonconsolidated affiliates, bank capitalization, and risk taking. Journal of Banking & Finance (Elsevier), 97, 109–129.
Guerard, J. (2017). The theory of risk, return, and performance measurement. In B. John Guerard. (Ed.), Portfolio construction, measurement, and efficiency: Essays in honor of Jack Treynor (pp. 1–38). Switzerland: Springer International Publishing.
Hagstrom, R. (2014). The Warren Buffett portfolio: Mastering the power of the focus investment strategy. New Jersey: John Wiley & Sons e-library.
IS-LM Model. (2019, May 1). Wikipedia. Retrieved from https://en.wikipedia.org/wiki/IS%E2%80%93LM_model
Koster, A., & Zimmermann, J. (2017). Bank capitalization and bank performance: A comparative analysis using accounting- and market-based measures. Banks and Bank Systems, 12(3), 4-26. Retrieved from https:// businessperspectives.org/images/pdf/applications/publishing/templates/ article/ assets/9027/BBS_ 2017_03_Koster.pdf
Ma, G., Xiandong, Y., & Xi, L. (2011). China’s evolving reserve requirements (Working Papers No. 360). Retrieved from http://www.bis.org/publ/work360.pdf
Memmel, C., & Schertler, A. (2013). Bank management of net interest margins: New measures. Financial Markets and Portfolio Management, 27(3), 275–297. Retrieved from https://mail.google.com/mail/u/0/#inbox/ FMfcgxwBVDJgdlWJdZxwgcnRhdKGvQrR?projector=1&messagePartId=0.4.
Norges Bank Investment Management Discussion Note #7. (2012, 30 March). On equity investments Retrieved from https://www.nbim.no/globalassets/documents/dicussion-paper/2012/discussionnote_7-12_final.pdf
Otoritas Jasa Keuangan [Financial Services Authority]. (2014). Indonesia banking statistics. Retrieved from https://ojk.go.id/en/kanal/perbankan/data-dan-statistik/statistik-perbankan-indonesia/Pages/Indonesia-Banking-Statistic
Pasaribu, R., & Kowanda, D. (2013). Implementasi efficient frontier dalam optimisasi portofolio: Studi kasus saham LQ-45. Jurnal Ekonomi & Bisnis, 7(1), 1–26.
Pop, I., Cepoi, C., & Anghel, D. (2018). Liquidity-threshold effect in non-performing loans. Finance Research Letter, 27, 124-128. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S1544612317307201 on 8/9/2018
Posnaya, E., Kaznova, M., Shapiro, I., & Vorobyova, I. (2018). Theory and practice of capital estimation methods: An application in bank management. European Research Studies Journal, 21(2), 497–505. Retrieved from https://ideas.repec.org/a/ers/journl/vxxiy2018ispecial2p497-505.html
Rengasamy, D. (2014). Impacts of loan deposit ratio to profitability: Panel evidence from commercial banks in Malaysia. Proceedings of the 3rd International Conference in Global Business, Economics, Finance and Social Sciences, December 19–21, 2014, p. 4. Retrieved from http://globalbizresearch.org/Mumbai_ Conference/pdf/pdf/MF498.pdf
Riyadi, S. (2006). Banking assets and liability management (3rd ed.). Jakarta, Indonesia: Lembaga Penerbit FEUI.
Saksonova, S. (2014). The role of net interest margin in improving banks’ asset structure and assessing the stability and efficiency of operation. Procedia—Social and Behavioral Sciences, 150, 132–141. https://doi.org/10.1016/j.sbspro.2014.09.017
Savitri, E. (2018, January). Bank Negara Indonesia (BNI): Wait and See Game. Danareksa Update, p. 1. Retrieved from http://dmia.danareksaonline.com/Upload/Morning%20pack%2020130429.pdf
Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance (19)3, 425-442. doi.org/10.1111/j.1540-6261.1964.tb02865.x
Treynor, J. (1961, August 8). Market value, time, and risk. Retrieved from https://ssrn.com/abstract= 2600356 or http://dx.doi.org/10.2139/ssrn.2600356
Trinugroho, I., Agusman, A., & Tarazi, A. (2012). Why have bank interest margins been so high in Indonesia since the 1997/1998 Financial Crisis? Research in International Business and Finance, 32, 139–158. Retrieved from https://doi.org/10.1016/j.ribaf.2014.04.001
Turcas, F., Dumiter, F., Brezeanu, P., Farcas, P., & Coroiu, S. (2019). Practical aspects of portfolio selection and optimisation on the capital market. Economic Research-Ekonomska Istrazivanya, 30(1), 14–30. Retrieved from https://www.tandfonline.com/doi/full/10.1080/1331677X.2016.1265893
Wagner, W. (2009). Efficient asset allocation in the banking sector and financial regulation. International Journal of Central Banking, 5(1), 75–95. Retrieved from https://www.ijcb.org/journal/ijcb09q1a3.pdf