What Factors Determine Bank Profitability? Evidence from the Indonesian Banking Industry

Abstract

Bank profitability is a relevant topic in financial economics, particularly in emerging markets. This study investigates the determinants of bank profitability in Indonesia over the 2011–2024 period, focusing on the underexplored segment of Primary Dealer banks. A Panel ARDL–PMG methodology is applied to a balanced panel of 13 banks over 14 years (2011–2024) to examine the long-run and short-run effects of macroeconomic and bank-specific variables on return on assets (ROA) and return on equity (ROE). The results identify operational efficiency (BOPO) and capital adequacy (CAR) as the dominant long-run determinants of bank profitability. A key asymmetry is observed in the NPL effect: while NPL consistently erodes equity returns (ROE), its effect on asset returns (ROA) is largely insignificant in most specifications and negative only when exchange rate controls are included. Among macroeconomic variables, the policy interest rate positively affects both profitability measures in the long run, while the exchange rate exhibits asymmetric effects across ROA and ROE. In the short run, internal bank factors dominate, with macroeconomic effects emerging predominantly over the long horizon. The paper contributes to the banking literature by highlighting asymmetric profitability dynamics within a dynamic panel framework and providing policy-relevant insights for bank management and financial regulatory authorities.