Modeling Sustainable Profitability in the Indonesian Banking Sector

This study justifies a predictive model of banking profitability in Indonesia. The model serves as a tool to assist bank management in making decisions during adverse conditions. A Partial Least Squares (PLS) approach within a Structural Equation Modeling (SEM) framework is used to analyze financial performance data from 2014 to 2018, covering the ten largest banks in Indonesia based on asset volume. The model predicts bank profitability using four latent variables: Operational Efficiency, Capital Adequacy, Asset Quality, and Firm Size. In total, these five latent variables are measured using 12 accounting, financial, and economic ratio indicators. The findings demonstrate significant relationships between Operational Efficiency and Profitability, Capital Adequacy and Operational Efficiency, as well as Firm Size and Asset Quality. Additionally, Operational Efficiency is found to mediate the effect of Capital Adequacy on Profitability. However, the study finds no significant influence between Asset Quality and Profitability, nor between Firm Size and Profitability through Asset Quality (indirect effect).