result, the level of profitability to decline. Therefore, banks should implement a policy on the management of liquidity on its own funds, to avoid excess or
shortage of funds, since both affect not advantageous for the bank.
2.1.2. Bank Profitability Theory
Profitability can be defined as the ability of banks to earn revenue and profit in a given period by using labor, capital and asset Seiford in
Rindathmono 2005 and Supraba, 2011. Profitability is very important for a bank because the bank funds are majority from third-party funding, which will
be able to increase the profitability of their own capital, because the extra profit that is greater than the additional interest expense. Profitability measurement
used in this study is the Return on Assets ROA, where the higher the ROA, show better financial performance, due to the greater rate of return. It also
means that if the ROA increases, the profitability of the company will be increased so that there will be an increase in profitability enjoyed by
shareholders Husnan, 1998. Dendawijaya 2003 stated that in determining the health of banks,
Bank Indonesia is more concerned with valuation of Return on Assets ROA and does not include elements Return on Equity ROE, this is because Bank
Indonesia prefers the value of profitability of a bank as measured by assets with funds mostly from the public deposits. ROA reflects the managements
ability to utilize the banks’ financial and real investment resources to generate profits. ROA is a better proxy for bank profitability as opposed of ROE
because ROE disregards financial leverage Flamini et al, 2009. Also in the
study of Ommeren 2011 and Schipper 2013 mention that ROE is an useful tool in the measurement of profitability during prosperity, but be weak measure
during periods of high volatility, such as in a crisis. Therefore, in this study ROA is used as a measure of banking performance. According to Horne and
Wachowicz 2005, ROA is used to measure the overall effectiveness in generating profits through asset available which is given that profit is obtained
from interest income service-based income and non-interest income fee- based income. So, the formula to get the value of ROA is as follows.
= x 100
2.1.3. Bank Profitability Indicators
