ABSTRACT
Using data from 47 listed Indonesian conventional banks during the period from 2010 to 2014, we examine the impact of loan portfolio concentration in the economic sectors on banks’ returns and risk. We also consider the different types of bank ownership and foreign banks’ mode of entry (greenfield or takeover). First, the results show that, in general, loan portfolio concentration does not affect the returns of conventional Indonesian banks. Second, when we consider different types of bank ownership and foreign banks’ mode of entry, we find that higher profit is obtained by private banks that implement a concentrated loan portfolio based on the economic sectors. However, no evidence was found that the mode of foreign entry affected their returns. Third, consistent with corporate finance theory, we find that loan portfolio concentration negatively affects the risks of conventional Indonesian banks. Lastly, loan portfolio concentration, based on different types of bank ownership and foreign banks’ mode of entry, does not affect a bank’s risk. Thus, loan portfolio concentration reduces a bank’s risk, regardless of its type of ownership and mode of entry. In particular, loan portfolio concentration improves the performance of private banks.
