395
Figure 4.3. Percentage Loan Portfolio Allocation to Different Economic Sectors for Small vs Large Domestic-owned Banks
Figure 4.3 provide evidence that both small and large DBs focus on similar sectors but they differ in
tendency. Large DBs focus primarily on the same sectors as small DBs but with a sharp declining trend
for trade sectors and an increasing trend for others. The loans allocated to unspecified others represent
more than 35 of the total loans of large DBs in 2011. Small DBs provide relatively smaller portions
of their loans to other sectors. In this regard the highest loan allocation by the small DBs is around
30 to the trade sector in 2011.
Figure 4.4. Percentage Loan Portfolio Allocation Based on Loan Types for Small and Large Domestic-owned Banks
Both large and small DBs become more involved in short-term financing of different business
sectors with working capital becoming their most prominent type of finance as confirmed in Figure 4.4.
However, small DBs seems to be more concentrated on single types of loans compared to large DBs. It is
evident from Figure 4.4 that large DBs are more diversified than small DBs with regard to loan types.
4.1.2 Loan Portfolio Performance Risk and Return of Large vs Small Domestic-owned Banks
According to Cronje 2013 loan portfolio risks are classified into two broad categories namely intrinsic,
and concentration risk. Within the context of this study intrinsic risk refers to the risk inherent to each
sector, and each loan type of a bank. Intrinsic risk cannot be measured in this study since comparative
risk information like loan defaults for each sector and each loan type is not available. Only loan repayment
default information, provided in the form of NPLs for the total loan portfolio is available for individual
0,05 0,1
0,15 0,2
0,25 0,3
0,35 0,4
2 3
2 4
2 5
2 6
2 7
2 8
2 9
2 1
2 1
1
Loan Portfolio Composition of Small DBs
agri mining
manuf elec
constr trade
transp bus_serv
soc_serv others
0,1 0,2
0,3 0,4
0,5 0,6
0,7
2 3
2 4
2 5
2 6
2 7
2 8
2 9
2 1
2 1
1
Small DBs
wc invt
consumt
0,05 0,1
0,15 0,2
0,25 0,3
0,35 0,4
2 3
2 4
2 5
2 6
2 7
2 8
2 9
2 1
2 1
1
Loan Portfolio Composition of Large DBs
agri mining
manuf elec
constr trade
transp bus_serv
soc_serv others
0,1 0,2
0,3 0,4
0,5 0,6
2 3
2 4
2 5
2 6
2 7
2 8
2 9
2 1
2 1
1
Large DBs
wc invt
consumt
396 banks and is used as proxy of overall bank loan
portfolio risk. In this research, the ratio of gross NPLs to Total Loans TLs is used as the proxy for loan
repayment default risk See Figure 4.5. The higher the NPL percentage, the higher the loan portfolio risk.
Figure 4.5. Loan Repayment Default o Risk of Small and Large
Domestic-owned Banks for the period 2003 to 2011
The NPLs of the small and large DBs differ the most from each other in 2007, but the differences
decrease with minor NPL differences remaining in 2011. The gross NPLs of large DBs are higher than
that of the small DBs in most of the years during the research period. It is interesting to note that the NPLs
of small DBs exceed those of large DBs during the GFC period 2007-2009. However, small DBs
experience a decrease in gross NPLs at the end of research period in 2011. Overall, the NPLs for both
the small and large DBs show a decreasing trend from 2003 to 2011. It indicates that the overall credit risk of
banks decreases and that the quality of their loan portfolios improved over the nine-year study period.
Figure 4.6. Loan Portfolio Return of Small and Large Domestic-owned Banks
To measure the loan portfolio return, the ratio of loan interest income to average total loans is used in
this research since in the broader sense it reflects the comparative pricing applied by banks.
Figure 4.6 depicts the loan interest income ratios for small and large DBs over the period 2003-2011.
In general, both small and large DBs experience a downward trend in their loan interest income from
2006 to 2011. This is due to changes in the central bank interest rate from 12.75 in 2005 to 6 in
2011
7
. It affects all banks but notwithstanding such changes, banks still apply different rates based on
7
Central bank rate serves as the reference rate since 2005, hence no data available prior to 2005.
inter alia their specific market segments and supply and demand for the loans that they provide. Small
DBs show the highest loan interest income in all years. Considering this situation, small DBs in general
have a higher average return than large DBs over the nine year research period.
In addition, t he result is in
line with the findings of Carter et al. 2004 that small banks earn higher returns than large banks due to their
performance structure, information advantage and development
of relationships
with customers.
However, the findings of Carter et al. 2004 is based on the risk adjusted yield of return whereas this
research uses the loan interest income to average total loans ratio.
0,01 0,02
0,03 0,04
0,05 0,06
2003 2004
2005 2006
2007 2008
2009 2010
2011 Small
Large
0,05 0,1
0,15 0,2
2003 2004
2005 2006
2007 2008
2009 2010
2011 Small
Large
397
4.2 Differences in the loan portfolio structure and performance of small and
large domestic-owned banks Table 4.2 displays the results of the Mann-Whitney
test performed to verify the descriptive statistics findings presented in the previous section of this
paper with regard to the differences in the loan portfolio structure and performance of small and large
DBs.
Table 4.2. Univariate Statistics for the Loan Portfolio Structure and Performance of Small and Large Domestic-owned Banks
Large Banks
n=69 Small
Banks n=346
Difference Mann-Whitney Test
Z Prob Z
EHHI 0.2944
0.3525 -0.0581
4.78 0.0000
THHI 0.4957
0.5868 -0.0911
3.373 0.0007
Risk 0.0356
0.0365 -0.0009
-6.368 0.0000
Return 0.1270
0.1586 -0.0316
3.959 0.0001
Note: The Mann-Whitney tests are conducted for testing the loan portfolio structure and performance median differences between the small and large DBs over the nine-year study period. Statistically significant
differences at 1, 5, and 10 significance levels are respectively indicated by , , and . The Mann-Whitney test shows that there are
statistically significant differences in the EHHI and THHI loan portfolio concentration and in the loan
portfolio performance risk and return of small and large DBs. It therefore confirms that size does matter
in explaining the loan portfolio structures and the performance of DBs in Indonesia.
4.3 Empirical results
Table 4.3 presents the fixed effect panel data regression used to determine the relationship between
DB sizes; their EHHI and THHI loan portfolio concentration levels; and their loan repayment default
risk loan portfolio risk and loan portfolio returns.
The negative coefficient of the size dummy regressors in Table 4.3 shows that the loan portfolio
returns of large DBs smaller than that of small DBs, however the result is insignificant. Although the
impact of size differences on loan portfolio returns is evident in the univariate analysis, the multivariate
analysis gives evidence that the effect of other variables such as loan portfolio concentration EHHI
and THHI are more significant. The negative coefficient of EHHI contradicts the findings of
Hayden et.al 2006 regarding Germany banks where diversification resulted in lower return. The
relationship between bank liquidity and loan portfolio returns also shows a significant negative relationship
in this study. It means DBs with high liquidity ratios experience lower loan portfolio returns. Finally, the
positive and significant relationship between GDP and loan portfolio return represents the impact of
economic cycles on the portfolio return from market segments that banks conduct business with.
To further examine the effect of size on the relationship between the independent variables and
the loan portfolio returns, the interaction effect fixed effect panel data regression results are contained in
Table 4.4. Based on the information in Table 4.4, the only
significant size interaction effect exists for NPL; the negative relationship between NPL and loan portfolio
returns is more significant for the small DBs. This result indicates that higher risk loan portfolios provide
higher loan portfolio returns for the small DBs relative to that of the large DBs.
5 Conclusions
Previous research like that of De-Haas et al. 2010 indicates that bank size is one of the bank loan
portfolio determinants, as it may affect the market segment focus of banks. This paper attempts to
determine whether large and small DBs differ in terms of their loan portfolio composition, risk and
performance.
The findings support the hypotheses that small and large DBs differ with regard to loan portfolio
composition, risk and return. The loan portfolios of small DBs are more concentrated with focus on trade
and the consumer sector whereas large DBs have more diversified loan portfolios with more exposure
to the unspecified others consumption loans. The prominent consumption sector exposure of large DBs
indicates their intention to enter a higher priced and safer market segment.
The gross NPLs of large DBs is higher than that of the small DBs during most of the years in the
research period but overall the NPLs of both small and large DBs show a decreasing trend from 2006 to
2011. Regulation PBI 211PBI2000 jo PBI
152PBI2013 of the Central Bank that implemented
a 5 standard for the net NPL ratio of banks may have prompted all DBs to adjust their credit risk
assessment and or qualifying criteria for loans. The
