The findings arrive at a time when banks around the world are balancing financial stability, digital transformation, and economic uncertainty. In Indonesia, state-owned banks play a strategic role in financing national development, supporting businesses, and maintaining confidence in the financial system. Understanding the factors that most strongly influence bank profitability can help executives, investors, and regulators strengthen the banking sector for long-term growth.
Why Bank Profitability Matters
Profitability is one of the clearest indicators of a bank's financial health. A profitable bank is better positioned to expand lending, absorb unexpected losses, invest in innovation, and support economic growth.
Among the many financial performance indicators, Return on Assets (ROA) is widely used because it measures how efficiently a bank generates profits from its total assets. Higher ROA reflects stronger financial performance and more effective asset management.
According to the study, Indonesia's state-owned banks experienced considerable fluctuations in profitability between 2016 and 2025. Average ROA increased before the COVID-19 pandemic, declined sharply during the economic slowdown in 2020, and gradually recovered as economic activity resumed. These fluctuations highlight how profitability depends on both internal financial management and broader economic conditions.
How the Research Was Conducted
The researchers used a quantitative causal research design to examine the relationship between credit risk management and bank profitability.
The study analyzed:
- Four state-owned banks listed on the Indonesia Stock Exchange (IDX)
- Audited annual financial statements from 2016 to 2025
- A total of 40 financial observations
- Panel data regression analysis to identify which financial indicators significantly affected profitability
Four key indicators of credit risk management were evaluated:
- Non-Performing Loan Ratio (NPL)
- Loan Loss Provision Ratio (LLP)
- Capital Adequacy Ratio (CAR)
- Cost-to-Income Ratio (CIR)
Profitability was measured using Return on Assets (ROA). The researchers selected banks that consistently published audited financial reports, reported in Indonesian rupiah, and generated positive net income throughout the observation period, ensuring reliable and comparable data.
Strong Capital Improves Profitability
One of the study's most significant findings is the positive relationship between Capital Adequacy Ratio (CAR) and profitability.
Banks with stronger capital positions consistently generated higher returns on assets.
Adequate capital allows banks to absorb financial shocks, expand lending activities, comply with regulatory requirements, and strengthen public confidence. Well-capitalized banks also have greater flexibility to invest in technology and pursue sustainable business growth.
The statistical analysis confirmed that CAR had a significant positive effect on ROA throughout the ten-year observation period.
Operational Efficiency Has a Direct Impact
The study also found that Cost-to-Income Ratio (CIR) has a significant negative effect on profitability.
CIR measures how much a bank spends to generate operating income. Higher operating costs reduce the proportion of revenue that becomes profit.
Banks that successfully control operating expenses achieve stronger financial performance because more of their income remains available as net earnings.
According to the researchers, operational efficiency remains one of the most important drivers of profitability in Indonesia's state-owned banking sector.
Credit Risk Indicators Were Less Influential Than Expected
Contrary to many previous studies, the research found that Non-Performing Loans (NPL) did not significantly influence profitability.
Although higher NPL levels generally indicate poorer loan quality, the statistical analysis showed that fluctuations in bad loans did not materially reduce ROA during the study period.
Similarly, Loan Loss Provision (LLP) did not have a statistically significant impact on profitability.
The researchers suggest that strong capital buffers, prudent provisioning policies, and effective credit restructuring—particularly during and after the COVID-19 pandemic—may have helped state-owned banks maintain stable profitability despite changes in credit quality.
Practical Implications for Banking
The findings suggest that improving profitability requires more than simply reducing bad loans.
Instead, banks should prioritize:
- Maintaining strong capital adequacy.
- Improving operational efficiency.
- Accelerating digital transformation to reduce operating costs.
- Simplifying internal business processes.
- Continuing prudent credit risk management despite the limited short-term effect on profitability.
As Andreas and Sarwo Edy Handoyo of Tarumanagara University explain through their findings, financial resilience depends largely on maintaining adequate capital while continuously improving operational efficiency. Credit risk management remains important, but capital strength and cost control have a more immediate influence on profitability among Indonesia's state-owned banks.
Implications for Policymakers and Investors
The research provides valuable insights for Indonesia's financial regulators.
Policies that encourage strong capital buffers, risk-based supervision, digital innovation, and operational efficiency could further strengthen the resilience of state-owned banks.
For investors, the findings indicate that Capital Adequacy Ratio (CAR) and Cost-to-Income Ratio (CIR) deserve close attention when evaluating the long-term profitability of Indonesian banks. These indicators may provide stronger signals of future financial performance than credit risk indicators alone.
The authors also recommend that future studies incorporate macroeconomic variables such as GDP growth, inflation, interest rates, exchange rate movements, and digital transformation to provide a more comprehensive understanding of how banking profitability evolves in an increasingly technology-driven financial sector.
Author Profile
Andreas is a researcher from the Professional Accounting Program (PPAk), Tarumanagara University, whose research focuses on banking profitability, financial statement analysis, credit risk management, and corporate finance.
Sarwo Edy Handoyo, is a lecturer and researcher at the Faculty of Economics and Business, Tarumanagara University. His expertise includes financial management, banking, corporate governance, strategic management, and financial performance analysis.
Source
Article Title: The Effect of Credit Risk Management on Bank Profitability: Evidence from Listed Government-Owned Banks
Authors: Andreas, Sarwo Edy Handoyo
Journal: International Journal of Economic, Finance and Business Statistics (IJEFBS)
Publication Year: 2026
DOI: https://doi.org/10.59890/ijefbs.v4i3.9
URL: http://journalijefbs.my.id/index.php/ijefbs
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