THE IMPACT OF MACROECONOMICS FACTOR, CAPITAL STRUCTURE AND LIQUIDITY ON THE FOREIGN BANK'S PERFORMANCE IN INDONESIA.

Author:Akbar, Muhammad
Position:Report - Abstract
 
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INTRODUCTION

Research Background

Foreign banks group in Indonesia were under pressure throughout 2015 as their larger loan portion were distributed to corporations rather than to the retail segment. In fact, corporations are less expansive throughout the year due to the economic slowdown and the weakening of commodity prices. The bank's net profit slumped for the first time since 2012 which continued to record positive growth. Based on statistics from the Indonesian Financial Services Authority, throughout the eleven months of 2015, the net profit of foreign bank group in Indonesia slumped by 30.16% compared to the same period in 2014.

The business model of the branches of foreign bank group in principle consists of two major parts of the investment banking business and the conventional banking business. Investment banking business such as JP Morgan Chase Bank. While conventional banking business such as Citibank NA, Bank of Tokyo Mitsubishi UFJ Ltd., etc. Bank of Tokyo Mitsubishi UFJ Ltd. posted the highest profit growth of 262.39% to IDR 395 billion as of February 2017 and the largest loss was recorded by JP Morgan Chase Bank with a net loss of IDR 2.7 billion. Based on the intermediary function, Bank of Tokyo Mitsubishi UFJ Ltd became the largest credit provider, amounting to IDR 90.98 trillion, followed by HSBC for IDR 46.5 trillion and Citibank NA IDR 38.14 trillion. Based on monthly financial report data of February 2017, total foreign banks posted net profit of IDR 1.51 trillion, up 1.95% from the same period in 2016. However, net interest income fell 0.32% to IDR 2.96 trillion.

Viewed from capital structure, foreign banks generally have strong capital structure which is well above the national banking average of 22.91% per position in December 2016, only Standard Chartered Bank has a minimal CAR compared to other Foreign Banks. The low value of the company is allegedly due to the company's less financial performance in the last five years. This is indicated by the low financial performance measured by one of the financial ratios of Return on Assets (ROA). There are foreign banks whose performance tends to decline and even lose. But in general the financial performance of the company tends to be stable. Foreign banks tend to be conservative in conducted the improvement of strategies.

The condition above allegedly caused due to the aspect of liquidity. Commercial banks are one financial institution that has a vital role in the nation's economy, especially for countries which its economy is still very dependent on the presence of banks as a source of financing of its economic activities. In the macroeconomic order, the bank is a transmission belt that transmits monetary policy, while in micro-economic order, banks are a source of financing for both business and individual (Koch & Mac Donald, 2000). So that the role of banks in the fulfillment of liquidity for business and individuals is vital as well make banks very vulnerable to liquidity risk.

Refer to Diamond & Dybvig (1983); Rauch et al. (2008), one of the main reasons why banks are particularly vulnerable to liquidity risk is their role in transforming maturities and providing guarantees in order to meet the liquidity needs of their depositors. This resulted in bank liquidity being suddenly depleted and the difficulties of liquidity in a bank may spread to other banks, resulting a systemic risk as described above and there are only a few studies devoted to analyzing one of the major factors to make bank as a secure and trustworthy institution when there is an economic shock.

Based on this background, it is interesting to examine the effect of macroeconomics factor, capital structure and liquidity on the performance of foreign banks in Indonesia.

Research Objective

The objective of this study is to examine the effect of macroeconomics factor, capital structure and liquidity on the performance of foreign bank in Indonesia.

LITERATURE STUDIES

Liquidity

Liquidity can be defined as the ability of financial institutions to fulfill all their obligations related to the demand for funds (Yeager & Seitz, 1989; Gitman, 2009). This opinion is also in line with the definition of liquidity proposed by Sauer (2007); Williamson (2008); Bank for International Settlements (2008); Moore (2009), namely the ability of banks to fund the increase in assets and meet the obligations that have matured without experiencing an unacceptable loss. For that bank needs to keep the liquid assets to meet the obligations of its customers or tend to be precautionary (precautionary). If the bank does not have sources of funds in meeting its customers' demand, the bank must borrow to the interbank money market or central bank.

Refer to Farag, Harland & Nixon (2013), the source of bank liquidity consists of cash or assets that can be converted into cash within a short time at a reasonable cost. A slightly different opinion is expressed by Myers & Rajan (1998) where liquidity is described as the ease of converting assets into other assets through trade. So that liquidity can also be interpreted as a convenience in converting assets into money used in the trading process.

Based on those definition, the liquidity used in this study is in accordance with the definition from Bank for International Settlements (BIS), namely as the ability of banks to fund the increase in assets and meet its obligations without causing harm. Because the definition proposed by BIS has become the reference of the banking in the world and also very comprehensive and includes various definitions that have been put forward by previous researchers. In this research, liquidity is measured by the dimension of loan to deposit ratio.

Foreign Bank Performance

According to Owolabi, Obiakor & Okwu (2011); Vodova (2011), the bank's performance is associated with profitability as measured by the amount of revenue generated by a firm that exceeds the relevant costs associated with generating that income. Lartey, Antwi & Boadi (2013) define profitability as the ability of banks in generating revenue far greater than the cost required.

There are some proxies that used by the previous researcher, Anbar & Alper (2011) measuring profitability using Return on Assets (ROA) and Return on Equity (ROE) as a function of the determinant factors of specific variables of banks and macroeconomics. Saleem & Rehman (2011) use ROA, ROE and Return on Investment (ROI) as proxy of profitability, where liquidity gives significant impact to ROA but not significant to ROE and ROI. Alshatti (2015) also uses the same proxy of ROE and ROA as proxy of profitability, where its research finds that there is the influence of liquidity to bank profitability indicated by ROE and bank ROA.

Hahn & Powers (2010) examined the performance of banks by using Return on Assets (ROA) because ROA is a primary measure of the performance of banking industry (FDIC, 1995). ROA is one form of ROI, where the use of this measure is consistent with Porter's suggestion (1980, 1985) where ROI is an appropriate performance measure. Based on previous research, ROA is defined as the net income divided by total assets (Lenz, 1980; Robinson & Pearce, 1988; Bernstein, 1993). On the other hand Al-Tamimi & Jabnoun (2010) measure the performance of banks with ROA and ROE.

Based on the description above, the performance of foreign banks in this study is...

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