Loan Portfolio Concentration, Ownership and its Relation on Risk and Returns of Indonesian Conventional Banks
Posted: 16 Jun 2016
Date Written: June 15, 2016
Abstract
This study tests both of theory of traditional banking and the corporate finance theory, by examining the impact of loan portfolio concentration on banks’ return and risk of 47 Indonesian conventional banks over the 2010-2014. We also take into account the different types of bank ownership (state, private, and foreign-owned) and foreign banks’ mode of entry (greenfield and takeover). Results of this study show that in general, loan portfolio concentration does not affect banks’ return. In addition, when different types of bank ownership and foreign banks’ mode of entry taken into account, we find that private banks generate higher profit by implementing a concentrated loan portfolio based on economic sectors than state and foreign-owned banks. However, no evidence of mode of foreign bank entry on the return. Furthermore, this study indicates the existence of the theory of corporate finance, where we find that loan portfolio concentration negatively affects Indonesian conventional banks’ risk. We also find that loan portfolio concentration based on different types of bank ownership and foreign banks’ mode of entry does not affect bank’s risk. These findings imply that loan portfolio concentration seems to reduce bank’s risk regardless its type of ownership and mode of entry. In particular, loan portfolio concentration seems to improve the performance of private banks.
Keywords: Loan Portfolio, Ownership, Mode Entry, Bank Performance
JEL Classification: G21
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