An Analysis of Loan Portfolio Growth and Foreign Bank Ownership on Banking Profitability and Credit Risk; Evidence from the Indonesian Banking Industry

Abstract

This study aims to examine the significance impact of loan portfolio growth and
foreign bank ownership on profitability and credit risk. Using panel data analysis, we estimate
this relationship of variables of 58 Indonesian commercial banks for the period of 2006-2014.
Return on asset (ROA) and return on equity (ROE) are used as our measurement of profitability;
meanwhile credit risk is proxied by non-performing loan (NPL) and loan loss provision (LLP).
After controlling for bank specific factors and macroeconomic factors, as well as
Herfindahl-Hirschmann Index (HHI) to capture the effect of market concentration on the model,
we find a negative and significant impact of loan portfolio growth on credit risk, however
growth of loan portfolios do not contribute to the bank profitability. Additionally foreign bank
ownership is found to have a significant impact for the profitability and credit risk of the
Indonesian banking industry.