Compared with the above analysis, some correlation does seem to exist between liabilities share and CAR or NPL in 2003, as shown in Figure 5.3.
The higher CAR and the lower NPL probably made creditors more reluctant to deposit their money, although some inconsistencies are found in several banks, such as Bank Inter Pacifi c, Mandiri, and BNI, due to bank mortgages/
bonds issued to maintain the liquidity of the banks.
Source: PT. UFJ Institute Indonesia
However, if a multiple regression model is applied, the analysis shows that there is no relationship between some performance indicators and liabilities growth. The results are as follows:
The relationship between independent variables (CAR, NPL, and ownership) and dependent variable (liabilities growth) in 1998 and 2003:
The P-values obtained are 0.59 and 0.08 for the relationship in 1998 and 2003, respectively. This means that the relationship is not signifi cant at a 5%
significance level between the independent variables (CAR, NPL, owner-ship) and the dependent variable (see Appendix 3 and 4.a for details). Even though we may say that there is some relationship in the case of 2003 data, it is not very strong. Therefore, it is reasonable to construct another model with additional independent variables including ROA and ROE. However, the P-value obtained is 0.12, indicating that this expanded set of independent variables (ROA, ROE, CAR, NPL, ownership) still does not meaningfully explain the dependent variable, liabilities growth (see Appendix 4.b for de-tails).
Judging from the correlation between liabilities growth or share and bank soundness indicators, it can be said that creditors cannot be confirmed to have a signifi cant role in disciplining banks in Indonesia.
formance. Since stock price itself depends on the number of issued shares and publicly offered shares in the market, it is more appropriate to analyze the correlation between stock price increase rate and bank performance, i.e., NPL, CAR, ROA, and ROE as important indicators of the soundness and profi tability of the bank. As Table 5.3 illustrates, except for a few banks, a positive correlation between stock price increase and CAR, ROA, and ROE could be observed. Also observed was an expected negative correlation be-tween NPL and bank stock price increase. Therefore, it can be said that to some extent bank stock prices are responding to the soundness and profi t-ability indicators of the banks, indicating a corporate governance role of shareholders.
Table 5.3
Correlation between Bank Stock Price Growth and Performance
Bank Name NPL
BCA 0.15 -0.15 -0.28 -0.38
NIAGA -1 -0.94 0.94 0.68
LIPPO 1 0.02 -0.36 -0.37
PANIN -0.86 0.99 0.94 0.94
MEGA 0.45 0.97 1 0.99
NISP -0.41 0.41 -0.41 -0.93
PERMATA -0.42 0.75 0.41 0.37
DANAMON 0.77 0.44 0.37 0.33
BUANA 1 1 0.67 0.8
MANDIRI N/A N/A N/A N/A
BNI -0.65 0.91 -0.86 -0.94
BRI N/A N/A N/A N/A
VICTORIA N/A N/A N/A N/A
NUSANTARA P. -1 -1 1 1
PIKKO -0.73 0.06 -0.48 -0.49
DANPAC -0.43 -0.95 -0.38 -0.39
EKSEKUTIF 0.26 0.78 -0.35 -0.42
INTER PACIFIC -1 1 N/A 1
MAYAPADA -0.62 0.48 0.95 0.99
ARTHA NIAGA -0.92 -0.94 -0.54 -0.6
BUMI PUTERA N/A N/A N/A N/A
CIC 0.99 1 0.74 0.91
KESAWAN N/A N/A N/A N/A
SWADESI N/A N/A N/A N/A
AVERAGE -0.22 0.25 0.17 0.20
Source: PT. UFJ Institute Indonesia
Table 5.4 shows the stock market statistics of the banking sector compared to total stock market statistics. Market capitalization of the banking indus-try in Indonesia has grown signifi cantly, and its trading volume and trading value also indicate remarkable improvement. This might be due to the de-creasing number of troubled commercial banks and recapitalization of many banks.
Table 5.4
Banking Industry Stock Market Statistics
1996 1997 1998 1999 2000 2001 2002 2003 2004 Market
Capitalization (%)
10.5 6.5 7.4 35.3 27.4 20.8 24.0 24.0 28.5 Trading Volume
(%)
13.4 22.4 17.3 42.2 21.4 21.0 28.1 30.9 26.3 Trading Value (%) 12.1 16.3 6.7 13.6 4.5 4.9 9.5 19.5 28.9 Number of Listed
Banks
24 32 32 34 21 23 24 26 24
Number of Commercial Banks
239 222 208 164 151 145 142 138 135
Source: Jakarta Stock Exchange Annual Statistics and BI, Indonesian Finan-cial Statistics 2004.
have been achieved. Supported by improved macroeconomic conditions, the overall performance of the banking sector has improved. This has been refl ected in a stronger capital structure, improved NPLs, higher profi tability, and recovery in bank intermediation. All banks are now in compliance with the mandatory capital adequacy ratio of 8%. At the time of our study, the CAR of all listed banks was maintained above the 8% required level, an in-dication that there had been improvement in the management of the banks.
Given the improved fi nancial conditions of the banking sector, the govern-ment of Indonesia has privatized some banks. Among the major accomplish-ments in this area have been the sales of BCA, Bank Niaga, Bank Danamon, and BII and the initial public offering of a 20% stake in the state-owned Bank Mandiri and BRI. Besides that, foreign investors have also increased their presence in Indonesia by holding stakes in some prominent banks, in-cluding the above banks.
Bank performance is measured by evaluating major performance indicators, such as return on assets (ROA), return on equity (ROE), capital adequacy ratio (CAR), and non-performing loan (NPL) ratio. In order to explore the relationship between the ownership and bank performance, we classify the publicly listed banks into three categories based on ownership structure from 2001–2003:
• government-owned banks, consisting of three publicly listed state-owned banks, namely Bank Mandiri, BRI, and BNI,34
• foreign-owned banks consisting of private listed banks of which 51% or more of the shares are sold to foreign investors, and
• private-owned banks.
BII, Lippo, and Danamon were classifi ed as private-owned banks until 2002, and in 2003 they were classifi ed as foreign-owned banks. Meanwhile, BCA, Bank Niaga, Bank Pikko, and Danpac were classified as private-owned
34. Although other six private banks had been temporarily taken over by Indonesian government during 2001-2003, we have categorized these banks as private banks since they were privatized again later.
ipation in private-owned banks due to the need to enhance the competition and to improve the banks’ management quality.
In comparison with the performance of private and foreign-owned banks, as shown in Table 5.5, the performance of government-owned banks is quite good. In terms of ROA, ROE, CAR, and NPL ratio, the government-owned banks have shown excellent performance compared to private and foreign-owned banks. Although the NPL of government-foreign-owned banks was higher than the BI requirement (5%) in 2001, it showed some improvement in 2002 and 2003. This accomplishment was partly the result of the loan restructur-ing program and the improvement in the quality of loans, which were chan-neled to the productive sectors, free from political intervention in their credit decisions.
Table 5.5
Performance of 26 Surveyed Banks by Ownership Type (%)
ROA ROE CAR NPL Ratio
2001 2002 2003 2001 2002 2003 2001 2002 2003 2001 2002 2003 Government-
Source: PT. UFJ Institute Indonesia
The superior performance of the government-owned banks compared with the private and foreign-owned ones could be explained by their higher com-pliance with good corporate governance practices, such as the establishment of nomination and remuneration committees (100%), transparent rules for selecting independent commissioners (100%), and various practices related to risk management (see Table 5.6). This is partly because the Indonesian government made very serious efforts to restructure state-owned banks’
Table 5.6
Selected Survey Results of Corporate Governance Practices based on Ownership of Banks 1 The establishment of Nomination &
Remuneration Committee
Independent Commissioner altering or adding the agenda of BoC meeting set President Commissioner Typical term for Independent Commissioner
There are transparent written rules for selecting the Independent Commissioner The minority shareholders can nominate the Independent Commissioners at shareholders meeting or prior to the meeting
General Support for BoC
There are mandatory education/training programs for BoC
The Banks provide any education/
training for BoC beyond what is
100%
9
Disclosure
Website in English and Bahasa 100% 58% 71%
10
Credit Risk Management
Written Credit Policies and Procedures covered:
- Target Markets - Structure of Limits
- Exception processing/reporting - Portfolio Mix
- Approval Authorities - Price and Non Price Terms
100% Top Management directly handle:
- Standard for valuing position &
measuring performance
- Systems/standards for measuring risks
100% - The operational risk is currently being
managed by the bank and reported as a
distinct risk category 100% 77% 100%
Source: PT. UFJ Institute Indonesia