The capital buffer paradox: Strong heterogeneity in profitability determinants between small and over capitalized banks in Indonesia

Baharuddin Baharuddin; Budi   Krisnanto; Abdul Gafar  Samalam; Muhammad  Rizal

doi:10.55942/pssj.v5i12.1053

Authors

Baharuddin Baharuddin Institut Bisnis Dan Keuangan Nitro Makassar
Budi Krisnanto Institut Bisnis Dan Keuangan Nitro Makassar
Abdul Gafar Samalam Institut Bisnis Dan Keuangan Nitro Makassar
Muhammad Rizal Institut Bisnis Dan Keuangan Nitro Makassar

DOI:

https://doi.org/10.55942/pssj.v5i12.1053

Keywords:

bank profitability, return on assets, capital adequacy ratio, loan to deposit ratio, moderation, over capitalization, Indonesian banking

Abstract

The Indonesian banking sector faces a paradox of maintaining high capital buffers for stability while pursuing profitability amid digital disruption. This study examines the profitability determinants of conventional commercial banks, with a novel focus on testing the moderating role of the Capital Adequacy Ratio (CAR) in the loan-to-deposit ratio (LDR) and return on assets (ROA) relationship a mechanism hypothesized to explain previous empirical inconsistencies. Using quarterly panel data from 43 banks from Q1 2020 to Q3 2025 (989 observations) and a Fixed Effects model corrected with robust standard errors, the results reveal three key findings. First, the moderation hypothesis is rejected; high capital buffers do not significantly alter the impact of LDR on ROA. Second, operational efficiency (BOPO) proves to be the most consistent and dominant determinant of profitability. Most importantly, the key contribution lies in the discovery of sharp heterogeneity: traditional determinant models exhibit very strong explanatory power (R² = 66%) for small banks (CAR ≤ 25.1%) but fail to explain profitability for large, over capitalized banks (R² = 26.1%), where no traditional variables are significant. This demonstrates that profitability drivers evolve with bank scale, rendering one size fits all policy and strategic approaches ineffective. Consequently, regulators must implement differentiated macroprudential policies, while bank management should tailor core strategies based on their specific segment.

Author Biographies

Baharuddin Baharuddin, Institut Bisnis Dan Keuangan Nitro Makassar

Baharuddin is a Lecturer at the Faculty of Economics and Business, Institute of Business and Finance Nitro. His areas of expertise include monetary economics, banking finance, financial system stability, and marketing. He has published various research in national and international journals and possesses practical experience in Financing Institutions, Banking, Automotive Marketing Companies, as well as being a speaker in training sessions, seminars, and a financial and business consultant.

Budi Krisnanto, Institut Bisnis Dan Keuangan Nitro Makassar

Budi Krisnanto is a Lecturer at the Faculty of Economics and Business, Institute of Business and Finance Nitro. His areas of expertise include banking finance, financial system stability, and marketing. He has published various research in national and international journals and possesses practical experience in Banking, business ventures, as well as being a speaker in training sessions, seminars, and a business consultant.

Abdul Gafar Samalam, Institut Bisnis Dan Keuangan Nitro Makassar

Abdul Gafar Samalam is a Lecturer and Head of the International Trade and Retail Management Study Program at the Faculty of Economics and Business, Institute of Business and Finance Nitro. His areas of expertise include banking finance, financial system stability, and bank marketing. He has published various research in national and international journals and possesses practical experience in Banking, as well as being a speaker in training sessions, seminars, and a consultant.

Muhammad Rizal, Institut Bisnis Dan Keuangan Nitro Makassar

Muhammad Rizal is a Lecturer at the Faculty of Economics and Business, Institute of Business and Finance Nitro. His areas of expertise include financial economics, banking management, and corporate finance. He has published numerous research articles in national and international journals and has practical experience in banking institutions and financial consulting. He also frequently serves as a speaker at various training sessions and seminars related to finance and banking.

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