Measuring the Financial Performance of Indonesian Banking Industry Using Risk-Based Bank Rating

Cut Sjahrifa , Wiwiek Mardawiyah Daryanto , 1 2 Vanya Kanyaka Ananggadipa Sekolah Tinggi Manajemen Ipmi, DKI Jakarta 12750, Indonesia 12 School of Business and Management, Bandung Institute of Technology, DKI Jakarta 12950, Indonesia 3 INTRODUCTION A bank is a inancial institution that acts as an intermediary who accepts deposits from the public and distribute credit. Banks also aimed in supporting the implementation of national development in order to maintain economic growth and national stability. Due to their importance in the inancial stability of a country, banks are highly regulated in most countries including Indonesia. In past years, Indonesian banking industry faced a challenging period particularly in riding the business slowdown, managing bad loans (include Copyright © 2018 Authors. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. International Journal of Business Studies Vol. 2 No. 1 ( February 2018) 34 a downward trend of loan growth), and an increasing rate of non-performing loans (NPL). Since the beginning of 2014, economic growth has been trending down as exports of primary commodities fell, and growth slowed in the international market, especially China. In addition, the high interest rate environment and the weakening of Rupiah had affected the domestic demands as well. However, the decrease of business performance affected banking performance in the past 2 years. It should be noted that the uncertainties in the economy led to a smaller appetite for business expansion. But based on PricewaterhouseCoopers’ Indonesian Banking Survey 2017, Indonesian bankers still clearly feels that they are in the most attractive market in Southeast Asia. So, the banks that will perform better, with more stable long-term performances will be those that are able to maintain their asset quality and liquidity, and also sustain margins. According to Bank Indonesia’s regulation that stated on No. 13/1/PBI/2011, all the Banks in Indonesia should do the self-assessment the level of inancial health with Risk-based Bank Rating approach. The previous researches about inancial performance is commonly to do in many industry sectors such as oil and gas, pharmaceutical, mining industry, etc. Therefore, the purpose of this study is to measure the inancial performance from 2012 to 2016 between banks that included in BUKU 4 category to the national performance condition. The banks are Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI), Bank Mandiri, and Bank Central Asia (BCA). Abdi Dufera and his advisor Dr. Fisseha Girmay, PhD (2010) on his research project said using previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data. Trend analysis is important, because with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may ind whether the ratio is falling, rising, or remaining relatively constant. The research questions are (1) Who is the Bank leader that represent the national condition? (2) What is the difference of inancial performance between the BNI, BRI, Bank Mandiri, and BCA? This study is worth for students because it deepens and understand the analysis of inancial ratio in the real practice. In addition, this study also important to Indonesian bankers to know the inancial performance and position among the competitor, so they can analyze the situation and make a strategy to improve the performance. LITERATURE REVIEW Development of Banking Industry in Indonesia Back on 1950, the Indonesian economic structure and national bank activities remained being dominated by foreign banks, while the domestic national banks playing insigni icant role. Until the birth of Bank Indonesia in 1953, the Indonesian banking industry turned into an industry where all its activities were regulated by the government and Bank Indonesia. Currently Indonesia has four categories based on the core capital that owned by the banks; BUKU 1, banks with total core capital (Tier 1) less than IDR 1 Trillion; BUKU 2, banks with total core capital (Tier 1) between IDR 1 Trillion to less than IDR 5 Trillion; BUKU 3, banks with total core capital (Tier 1) between IDR 5 Trillion to less than IDR 30 Trillion; and BUKU 4, banks with total core capital (Tier 1) between above IDR 30 Trillion. This study only uses selected banks that included on BUKU 4 category which can represent 50% of national banking industry, starting from the loans, total third parties fund, total equity, and by all means these banks can cover majority public needs. Bank Total Core Capital (In billion IDR) Bank Negara Indonesia 89,254 Bank Rakyat Indonesia 136,670,139 Bank Mandiri 130,356,495 Bank Central Asia 110,246,294 Table 1. Banks on BUKU 4 Category (as per December 2016) Source: Annual Report 2016 each Bank


INTRODUCTION
A bank is a inancial institution that acts as an intermediary who accepts deposits from the public and distribute credit. Banks also aimed in supporting the implementation of national development in order to maintain economic growth and national stability. Due to their importance in the inancial stability of a country, banks are highly regulated in most countries including Indonesia.
In past years, Indonesian banking industry faced a challenging period particularly in riding the business slowdown, managing bad loans (include a downward trend of loan growth), and an increasing rate of non-performing loans (NPL). Since the beginning of 2014, economic growth has been trending down as exports of primary commodities fell, and growth slowed in the international market, especially China. In addition, the high interest rate environment and the weakening of Rupiah had affected the domestic demands as well.
However, the decrease of business performance affected banking performance in the past 2 years. It should be noted that the uncertainties in the economy led to a smaller appetite for business expansion. But based on PricewaterhouseCoopers' Indonesian Banking Survey 2017, Indonesian bankers still clearly feels that they are in the most attractive market in Southeast Asia. So, the banks that will perform better, with more stable long-term performances will be those that are able to maintain their asset quality and liquidity, and also sustain margins.
According to Bank Indonesia's regulation that stated on No. 13/1/PBI/2011, all the Banks in Indonesia should do the self-assessment the level of inancial health with Risk-based Bank Rating approach. The previous researches about inancial performance is commonly to do in many industry sectors such as oil and gas, pharmaceutical, mining industry, etc. Therefore, the purpose of this study is to measure the inancial performance from 2012 to 2016 between banks that included in BUKU 4 category to the national performance condition. The banks are Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI), Bank Mandiri, and Bank Central Asia (BCA). Abdi Dufera and his advisor Dr. Fisseha Girmay, PhD (2010) on his research project said using previous years' data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data.
Trend analysis is important, because with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may ind whether the ratio is falling, rising, or remaining relatively constant. The research questions are (1) Who is the Bank leader that represent the national condition? (2) What is the difference of inancial performance between the BNI, BRI, Bank Mandiri, and BCA?
This study is worth for students because it deepens and understand the analysis of inancial ratio in the real practice. In addition, this study also important to Indonesian bankers to know the inancial performance and position among the competitor, so they can analyze the situation and make a strategy to improve the performance.

LITERATURE REVIEW Development of Banking Industry in Indonesia
Back on 1950, the Indonesian economic structure and national bank activities remained being dominated by foreign banks, while the domestic national banks playing insigni icant role. Until the birth of Bank Indonesia in 1953, the Indonesian banking industry turned into an industry where all its activities were regulated by the government and Bank Indonesia.
Currently Indonesia has four categories based on the core capital that owned by the banks; BUKU 1, banks with total core capital (Tier 1) less than IDR 1 Trillion; BUKU 2, banks with total core capital (Tier 1) between IDR 1 Trillion to less than IDR 5 Trillion; BUKU 3, banks with total core capital (Tier 1) between IDR 5 Trillion to less than IDR 30 Trillion; and BUKU 4, banks with total core capital (Tier 1) between above IDR 30 Trillion.
This study only uses selected banks that included on BUKU 4 category which can represent 50% of national banking industry, starting from the loans, total third parties fund, total equity, and by all means these banks can cover majority public needs.

Previous Research on Bank Performance
According to Abdi Dufera and his advisor Dr. Fisseha Girmay, PhD (2010), Financial ratios are useful indicators of a irm's performance and inancial situation. Ratio analysis involves calculation and interpretation of inancial numbers by relating them in a logical manner in order to assess the strengths and weaknesses underlying the performance of an enterprise. We calculate ratios because in this way that we get a comparison that may prove more useful.
Indonesia is in top 20 Gross Domestic Product (GDP) 2016 in the world, not surprisingly Indonesian bankers still have con ident that they are in the country that has a continuous growth in the future. The survey highlights from PricewaterhouseCoopers' Indonesian Banking Survey 2017, 2016 was a more challenging year for many banks in Indonesia in comparison to past years, but bankers feel conditions are improving. While foreign banks are slightly less optimistic, half of foreign banks still believe conditions are improving and almost no banks feel conditions are worse. Based on that survey, bankers believe that demand for credit is estimated to grow strongly due to demand originating from the developing industry sectors.
Based on the table above, the Indonesian banking sector has a steady growth in the past ive years. Steady but tends to decrease loan growth with compound annual growth rate (CAGR) of 10%, it also occurs on third parties fund growth with CAGR 8%.

b) Loan to Deposit Ratio (LDR) Ratio
LDR ratio can be used internally by the company or investors to determine the bank's short-term viability. A bank that accepts fund from third parties (Current Account, Saving Account, and Time Deposit) must have a certain measure of liquidity to maintain its operations. LDR ratio is measured using the following criteria; There have been a large number of empirical studies on commercial bank performance around the world (see Yeh, 1996;Webb, 2003;Lacewell, 2003;Halkos and Salamouris, 2004;Tarawneh, 2006). However, little has been done in research concentrated on multi bank to compare with national condition of its country.

The Variables and Parameters 1. Risk Pro ile Factor
In order to comment on the quality of a ratio one has to make a comparison with some standard or benchmark (Fabozzi, et al., 2003). The benchmark could be trend analysis or time-series analysis. In trend analysis, ratios are compared over periods, typically years. Year-to-year comparisons can highlight trends and point up possible need for action. Trend analysis works best with three to ive years of ratios.

a) Non-Performing Loan (NPL) Ratio
The sum of borrowed money upon which debtors has not made his scheduled payments for at least 90 days. A non-performing loan is either in Sub-Standard, Doubtful, or Loss. NPL ratio is measured using the following criteria; Non-Performing Loan is an important ratio to consider its pro itability. NPL is one of the most factor which directly impact banks company, seeing the core business of this industry is distribute credit from third parties' funds. The Higher NPLs mean higher loss provision and lower pro itability. Return on Asset (ROA) indicates how pro itable a company is relative to its total assets. This ratio also illustrates how well management using its total assets to make a pro it. The higher ROA means the company is ef icient in utilizing its assets.

Capital Factor
According to Bank Indonesia's regulation No. 13/1/PBI/2011, Capital Factor is an assessment of the level of capital adequacy and capital management. Capital Factor can be measured using Capital Adequacy Ratio (CAR). If the result of CAR ratio achieving above 14%, means the banks have a systemic impact. So, if the banks who have a systemic impact collapse, it will directly affect the Indonesian economy. Those banks required to have a higher capital reserve. CAR ratio is measured using the following criteria; Capital Adequacy Ratio (CAR) is the ratio of a bank's capital to its risk. Regulator track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements.

c) Current Account and Saving Account (CASA) Ratio
Basically, there are three types of third parties' funds: Current Account, Saving Account, and Time Deposits. This ratio is to indicates the composition in third party funds and how much of a bank's total deposits are in current and saving accounts. The higher ratio means a larger portion on CASA instead of time deposits. Today, the ideal condition is minimum 60% of CASA and 40% of time deposits. For a bank, it is favorable to getting money in low cost (interest for debtors) to generating pro it. CASA ratio is measured using the following criteria;

Earnings Factor
According to Bank Indonesia's regulation No. 13/1/PBI/2011, Earnings Factor is an assessment of the earnings performance, sources, and sustainability. Earnings Factor can be measured using Return on Asset (ROA) as follow; LDR ratio also can be used to assure a bank runs its initial function as an intermediary. On this ratio, Bank Indonesia applied the regulation of LDR ideal ratio is between 78% to 92%.

. Risk Pro ile Factor a) Non-Performing Loan (NPL) Ratio
From igure 1. denotes that from 2012 until 2014, the national condition remains stable means that cumulative of all banks in Indonesia can maintain the ratio under 2% (very healthy). Whereas on 2015 and 2016, the ratio was increase to above 2% (healthy). If compared with the national condition, BNI and Mandiri is above the line and have a signi icant increase of NPL. It will be eroded bank's pro itability. The igure 1 also shows that BCA has the most stable and well managed the NPL ratio under 1.5% in the past 5 years. However, all banks have a good achievement because their results are still on very healthy and healthy categories.

b) Loan to Deposit Ratio (LDR) Ratio
The igure 2. shows information about liquidity risk performance under LDR ratio. The igure also shows that BNI and BCA are good at maintaining the stability of their LDR. However, BCA still has fund laxness to do a credit expansion. Since Bank Indonesia applied the regulation of LDR ideal ratio is between 78% to 92%, overalls, the national condition and all banks have a good ratio of LDR.
Certainly, these banks are running their function well as a inancial intermediary who accepts deposits from third parties and distribute credit to business sector. Bank Indonesia also applied the regulation that 8% from LDR ratio as a statutory reserve, if the ratio exceeds 92% it means the 8% is taken from non-third parties fund for credit expansion. It indicates the banks is over in giving a loan or cannot ful illing third parties' funds, so they should take from non-third parties fund such as issuing bonds. CASA TD From all igures above denote that for the national condition, composition for third parties' funds are in average for 5 years 55% CASA and 45% Time Deposits. Overalls, all banks show the good ratio of CASA, but the highest ratio between four banks is BCA in average 77% CASA and 23% Time Deposits. This composition affects cost of fund which will impact on banks' pro itability measured by Net Interest Margin (NIM).

Earnings Factor
The igure 8. denotes there are a decrease trend in all banks except BCA for the last ive years. A decreasing ROA might be caused by the business slowdown and a decreasing growth in loan from 2012. However, if the result is above 1.5% means the inancial performance of the company is very healthy. Based on ROA's result, BCA is more stable in ef iciency in utilizing their assets to make a pro it.

Capital Factor
The igure above shows the percentage of the level of capital adequacy and capital management. It also shows that BRI has the highest result of CAR for ive years and be the closest bank on total capital with the national condition. However, all banks have CAR ratio above 14% meaning the banks in BUKU 4 are very healthy and have a systemic impact.

LIMITATION
This study is only examined several ratio and basic bank risks based on Risk-based Bank Rating (RBBR). RBBR required four factors to be determined and each factor has its own ratio. This study only focuses on three factors except the Good Corporate Governance (GCG) factor.
In near future, it is suggested to expand the literature about inancial performance in banking or other industry. It also suggested to examine the GCG factors to complete the analysis for 8 basic bank risks.

CONCLUSION AND RECOMMENDATION
The purpose of this research is to measure the differences of inancial performance between the BNI, BRI, Bank Mandiri, and BCA against the national condition using Risk-based Bank Rating (RBBR) method in the last ive years (2012 -2016). The research found that the inancial performance of those banks is good and include in ideal and very healthy condition especially in CAR, LDR, and ROA. Since all banks have a systemic impact, there was no signi icant result that pointed to one bank to be a bank leader that represent the national condition. All of them represents more than 50% -39 -  of national inancial performance although there was a slightly decline caused by a slowdown growth of business.
However, from the results on this study, the banks should more manage the stability of their NPL and CASA ratio in order to gain more pro itability. In 2015 and 2016, the ratio of all four banks and is getting higher that soared above 2%. It also happens with the national performance. NPL is one of the most factor which directly impact banks company, seeing the core business of this industry is distribute credit from third parties' funds. When the NPL increase, it will erode the bank' pro it. In line with NPL ratio, the ratio of CASA should manage in good composition. The higher CASA is better, because it also impacts on banks' pro itability which can be measured by Net Interest Margin (NIM).