Banking Profitability: How do the banking intermediary, secondary reserve, operational efficiency, and credit risk effect?

Abstract

Objective – A Bank is a financial institution that collects and distributes funds to the public to obtain Profitability. The Covid-19 pandemic has affected the economic sector, especially the banking sector. The intermediation function needs to run optimally, increasing investment in secondary reserves, decreasing operational efficiency, increasing credit risk, and reducing bank profitability. The research aimed to determine the effect of Banking Intermediation, Secondary Reserves, Operational Efficiency, and Credit Risk on Profitability at Regional Development Banks in Indonesia for the 2019 – 2022 period, partially and simultaneously. Banking Intermediation is measured by the ratio of credit to total third-party funds (Loan to Deposit Ratio/LDR), Secondary Reserve is measured by the percentage of securities held to third-party funds (TPF), Operational Efficiency is measured by the ratio of operating expenses to operating income (OEOI), Credit Risk is measured by Non-performing Loans (NPLs), and Profitability is measured by Return on Assets (ROA). Methodology – Descriptive and verification methods with a quantitative approach will be used in this study with secondary data from published financial reports from 22 Regional Development Banks in Indonesia. The data analysis technique used is multiple linear regression. Findings – The study's findings show that partially LDR has a positive and significant effect on ROA; Secondary reserve has a positive but not significant impact on ROA; OEOI and NPLs ratios have a negative and significant effect on ROA. While simultaneously, LDR, Secondary Reserve, OEOI Ratio, and NPLs substantially impact ROA. Novelty – Compared to previous studies, bank profitability is not only influenced by banking intermediation, operational efficiency, and credit risk but also by secondary reserves, although not significantly. Type of Paper: Empirical JEL Classification: G21, G32 Keywords: Banking Intermediation, Banking Profitability, Credit Risk, Operational Efficiency, Secondary Reserve. Reference to this paper should be made as follows: Buchory, H.A. (2023). Banking Profitability: How do the banking intermediary, secondary reserve, operational efficiency, and credit risk effect?, J. Fin. Bank. Review, 8(2), 85 – 96. https://doi.org/10.35609/jfbr.2023.8.2(1)