Abstract
Depositors, investors, as well as public in general need easily accessible indicators that are important to differentiate various banks. This research addresses simultaneously two important issues: analyzing and identifying which key publicly available financial indicators of banks are important, as well as approximating the weight of the aforementioned indicators when banks’ comparisons are to be made. Utilizing the recent 2017 database from 90 conventional banks, this study analyzes 17 banking ratios using the method of principal component analysis. The calculations show that five components explain around 75 percent of total variation in the data. Those five components represent indicators on profitability, quality of capital, quality of loans, fee-based activities, and liquid assets in the balance sheets. Further, by combining five principal components, the result shows that even small banks can achieve good financial performances.
Highlights
The banking industry in Indonesia has undergone massive changes in the past two decades
By the end of 2016, the number has been further reduced to only 116 conventional commercial banks currently operating in Indonesia [13], with the numbers likely to be further reduced in the future
Banks considered in BUKU 3 and 4 contributed 92.1 percent of total banking profit for data in this sample
Summary
The banking industry in Indonesia has undergone massive changes in the past two decades. Since the Asian financial crises of 1998 that brought the Indonesian economy to its knee with an economic contraction of 13.1 percent and inflation of 58.4 percent in 1998 [31], the landscape of the banking industry has changed. Whereas in June 1997 (prior to the crisis) there were 238 banks [25], by the end of 2000 only 151 commercial banks remained [20]. By the end of 2016, the number has been further reduced to only 116 conventional commercial banks currently operating in Indonesia [13], with the numbers likely to be further reduced in the future.. Take the example of the 2008 controversial and sudden closure of Bank Century2 [29] which caught the general public offguard and created protests
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