The impact of loan portfolio concentration and foreign bank entry on Indonesian banks’ returns and risk

Using data from 47 Indonesian conventional banks over the 2010-2014 period, we examine the impact of loan portfolio concentration based on economic sectors on banks’ return and risk. We also consider the different types of bank ownership and foreign banks’ mode of entry (greenfield and takeover). The results show that in general, loan portfolio concentration does not affect Indonesian conventional banks’ return. Second, when different types of bank ownership and foreign banks’ mode of entry taken into account, we find that private banks generate higher profit by implementing a concentrated loan portfolio based on economic sectors than state- and foreign-owned banks. However, no evidence of mode of foreign entry impacting their return is found. Third, consistent with theory of corporate finance, we find that loan portfolio concentration negatively affects Indonesian conventional banks’ risk. Lastly, loan portfolio concentration based on different types of bank ownership and foreign banks’ mode of entry does not affect bank’s risk. Thus, loan portfolio concentration seems to reduce bank’s risk regardless its type of ownership and mode of entry. In particular, loan porftolio concentration seems to improve the performance of private banks.and mode of entry. In particular, loan porftolio concentration improves the performance of private banks.Keywords: Loan portfolio, Ownership, Mode of foreign entry, Bank performance, Emerging market