THE EFFECT OF NON-PERFORMING LOANS AND LOAN DEPOSIT RATIOS ON STOCK RETURNS IS MEDIATED BY A PROFITABILITY STUDY ON COMMERCIAL BANKS LISTED ON THE INDONESIA STOCK EXCHANGE FOR THE PERIOD 2016 - 2018

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282

JAM

J u r n a l A p l i k a s i M a n a j e m e n J o u r n a l o f A p p l i e d M a n a g e m e n t

V o l u m e 2 1 I s s u e 2 J u n e 2 0 2 3

2 1 | 2 | 2 0 2 3

R e c e i v e d D e c e m b e r ‘ 2 2 R e v i s e d F e b r u a r y ‘ 2 3 M a rc h ‘ 2 3 A p r i l ‘ 2 3

A c c e p t e d M a y ‘ 2 3

THE EFFECT OF NON-PERFORMING LOANS AND LOAN DEPOSIT RATIOS ON STOCK

RETURNS IS MEDIATED BY A

PROFITABILITY STUDY ON COMMERCIAL BANKS LISTED ON THE INDONESIA STOCK

EXCHANGE FOR THE PERIOD 2016 - 2018

Yusuf Iskandar

STIE of Economics Jaya Negara Taman Siswa Malang, Indonesia Suharyanto

PGRI Adi Buana University Surabaya, Indonesia Achmad Zaki

Nahdlatul Ulama University, Indonesia Puri Setioningtyas Widhayani

The Hungarian University of Agriculture and Life Sciences Budapest Hungaria, Hungaria

Abstract: Stock return is an indicator of banking performance in Indonesia.

This study aims to empirically test non-performing loans and loan deposit ratios on stock returns mediated by return on assets at commercial banks listed on the Indonesian stock exchange in 2016-2018. The sample used in this study was 20 bank companies that met predetermined criteria. The data that has been collected is then analyzed using Path analysis to test the proposed hypothesis.

The findings of this study indicate that non-performing loans and loan deposit ratios each have a significant effect on stock returns and are mediated by return on assets. Based on these findings, it is recommended that banking companies, in managing financial ratios, must run more optimally to maximize stock returns obtained by banks. Non-performing loan, loan deposit ratio is a bank's financial ratio to assess its performance. These financial ratios have a purpose to determine the bank's ability to optimize the level of lending to the public, generate profits from the activities carried out and reject the risks from its operational activities. For banking companies, the findings of this study can be used in policy-making related to the delivery of information on bank performance reports to investors.

Keywords: Non-Performing Loan, Loan Deposit Ratio, Stock Return, Return on Assets

CITATION

Iskandar, Y., Suharyanto, Zaki, A., and Widhayani, P. S. 2023. The Effect of Non-Performing Loans and Loan Deposit Ratios on Stock Returns is Mediated by a Profitability Study on Commercial Banks Listed on The Indonesia Stock Exchange for The Period 2016 - 2018. Jurnal Aplikasi Mana- jemen, Volume 21, Issue 2, Pages 282–295. Malang: Universitas Brawijaya. DOI: http://dx.doi.

org/10.21776/ub.jam.2023.021.02.01.

I N D E X E D I N

D O A J - D i r e c t o r y o f O p e n A c c e s s J o u r n a l s

A C I - A S E A N C i t a t i o n I n d e x S I N T A - S c i e n c e a n d T e c h n o l o g y I n d e x

D i m e n s i o n s G o o g l e S c h o l a r R e s e a c h G a t e G a r u d a

I P I - I n d o n e s i a n P u b l i c a t i o n I n d e x

I n d o n e s i a n O N E S e a r c h

C O R R E S P O ND I N G A U T H O R

S u h a r y a n t o

P G R I A d i B u a n a U n i v e r s i t y S u r a b a y a ,

I n d o n e s i a

E M A I L

s u h a r i y a n t o @ u n i p a s b y . a c . i d

OPEN ACCESS

e I S S N 2 3 0 2 - 6 3 3 2 p I S S N 1 6 9 3 - 5 2 4 1

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INTRODUCTION

The development of the Indonesian economy in 2016 – 2018 seems to have experienced better growth. Indonesia's macroeconomic growth is essential for every country, and the more develop- ed macroeconomics can provide a positive value for economic stability. One of the contributors to macroeconomic growth is banking companies that continue to grow. Banks are business entities that are service companies and have a series of organ- izational structures and behaviors that are tasked with channeling funds, collecting funds, and providing credit services (Grant, 1996). Banks have an important role in carrying out their operational activities effectively and efficiently in formulating their strategies, both in terms of marketing which can provide positive values for banking performance. Following law no. 7 of 1992 concerning banking banks function optimally in channeling and withdrawing funds from the public. These condi- tionscanaffectthefinancialperformanceofbanks, which is very necessary, and they must report their performance transparently on the Indonesian stock exchange. The internal financial performance of a bank company is significant. It can be used to evaluate its operational activities, determine the management plans and strategic analysis, and measure or determine the size of a bank company in its line of business based on total assets owned.

Bank performance in managing non-performing loans, which is one of the ratios of non-performing loans, where there are constraints caused by customers, either intentionally or unintention- ally, in their obligations when they do not make payments to the bank (Kasmir, 2014). A credit risk must be resolved on time, both at maturity and af- ter maturity, and must comply with the applicable rules and agreements (Fahmi, 2012). Apart from completing it on time, the non-performing loans must be managed optimally so that loans given to the public and in terms of credit repayments must comply with the applicable terms and conditions so as not to cause problem loans. The condition of non-performing loans in recent years has decreased. It is because banks can channel credit effectively so that the velocity of money in generating profits will increase (Kasmir, 2014). The better the credit quality at the bank, the more influential the bank's operational activities will be, and the direct profit earned by the bank will also increase. It has

a significant effect on increasing the return on assets. This statement is supported by Partovi and Matousek (2018), Bouheni (2014), Lafuente et al.

(2018), Francis et al. (2018), and Edo and Wiagus- tini (2014), who stated that non-performing loans have a significant effect on return on assets.

The Loan Deposit ratio is one of the ratios owned by a bank to determine the bank's ability to channel funds originating from the public in the formofcredit.Creditcomponentscanbedisbursed through deposits, savings, certificates of deposit, and issued securities (bonds). According to the BI Regulation No.5/20/PBI/2003, using the loan deposit ratio (LDR) is set at a maximum of 110%.

The high credit extended by the bank can determine the profit that the bank gets. If a bank cannot distribute its credit optimally, it can cause losses for the bank (Kasmir, 2014). The more effective the bank is in channeling credit, the greater the op- portunity to obtain a high profit. The higher the loan deposit ratio, the higher the return on assets at the bank, but with the assumption that lending to the public must be effective and comply with applicable rules and regulations so that it will not cause bad credit for the bank in the future. This statement is supported by Ekpu and Paloni (2016), Samad (2015), and Ibrahim (2017), who stated that the ratio of loan deposits has a significant effect on return on assets. Non-performing loans can be calculated using the percentage of non-performing loans to the total loans to be disbursed by the bank (Mamduh, 2004). The lower the NPL ratio, the lower the risk of bad credit from corporate banks to credit will be smaller, so it can affect optimal bank performance improvement. The effectiveness of banks in extending credit can run efficiently and impact the performance of banks listed on the capital market for the better (Fama, 1980).

The higher the performance of banks in managing non-performing loans, the smaller the credit risk burden borne by the bank.

Optimal bank performance is supported by bank effectiveness in monitoring credit use selec- tively (Juliana et al., 2019). Banks are required to supervise customers in fulfilling their obligations.

On this monitoring, it is expected that the profit earned by the bank will increase and have a significant direct effect on increasing returns on the capital market. This statement is reinforced by Khad- dafi and Syamni (2011), Sood (2017), Syauta and

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284 Widjaja (2009), Umar and Sun (2018), and Elba-

dry (2018), which stated that non-performing loans have a significant effect on stock returns. The loan deposit ratio measures the amount of credit that will be given to the community and compared to the number of funds available in the community and using their capital (Kasmir, 2014). The loan saving ratio can affect the increase in profits through lending to the public. The higher the LDR indicates the number of funds channeled in the form of credit, so the bank benefits from credit interest.

These conditions can affect investors' judgments in making decisions on their investments, so simultaneously, they can affect the demand for shares in capital market to increase the value of stock prices and returns obtained by investors (Renwarin, 2017). This statement is reinforced by Khaddafi and Syamni (2011), Zulbetti (2011), Kurniadi and Mawardi (2012), and Elbadry (2018), which stated that the loan-savings ratio has a significant effect on stock returns. So it is necessary to test 20 banks that have good criteria in their return on shares.

The company's ability to carry out its activities during a specific period in generating overall profits is called return on assets (Gitman, 2003).

The success of bank companies in increasing profits can be seen from the effectiveness and efficiency of banks in using their assets optimally. The return on assets (ROA) is a measure of how much net profit is obtained from all assets (assets) owned by a bank company (Harahap, 2013). The profits obtained by the bank companies in carrying out their activities can provide a positive value for the bank performance. It can create a better bank financial condition to increase the value of the shares and returns obtained by investors in the capital market. This statement is reinforced by McMillan (2017), Che (2018), and Byström (2018), who stated that return on assets has a significant effect on stock returns. High non-performing loans can be a burden for bank companies, this can be seen from the situation where customers are no longer able to pay part or all of their obligations to the bank according to a mutual agreement (Ismail, 2013), but if customers can pay off their obligations, it will have an impact on decreasing the credit ratio problem with the bank. The NPL ratio can be seen from the total credit with substandard, bad, and doubtful quality levels to total credit according to PBI No 17/11/PBI/2015. Credit to banks can be

appropriately managed through the provision of credit and repayment of loans following applicable terms and conditions so as not to cause problems with non-performing credit scores. The lower non-performing loans indicate that the bank can channel its credit to the community optimally and effectively, so it is hoped that the profits obtained by the bank will increase (Siahaan and Asan- dimitra,2016).Increasingbankprofitabilityhasan impact on optimal bank performance.

Return on assets reflects a bank's ability to seek profit from all of its activities (Kasmir, 2014).

The return on assets can be seen from the effectiveness of bank management performance. If management performance is running effectively and optimally, it can affect the increase in profits earned by bank. The increasing return on assets can directly affect the increase in returns (Ulupui, 2007).

It shows an increase in profits earned by the bank, so the bank's performance can be said to be more optimal for increasing the value of shares and returns obtained by investors. The loan deposit ratio (LDR) development continues to increase yearly.

It illustrates the increasingly optimal management of credit originating from the community and own capital collected by banks (Kasmir, 2014). The loan deposit ratio reflects the ratio of loans given to third-party funds such as (Giro, Certificates of De- posit, Savings, and Time Deposits). It follows the Bank Indonesia Circular Letter No. 6/23/DPNP dated 31 May 2004. See the circular, the credit ratio at commercial banks continues to grow well.

This condition is because banks can manage credit properly and optimally, so it has an increasingly positive impact on bank performance. It also encourages increased returns on assets obtained from lending activities. Increasing the return on assets at banks will have an impact on increasing stock returns. The higher the rate of return obtained by investors, the greater the confidence of other investors to invest in bank companies driven by better bank performance. This study aims to empirically test the ratio of non-performing loans and credit savings to stock returns mediated by return on assets at commercial banks.

LITERATURE REVIEW Non-Performing Loans

Non-performing loans are one of the meas- urements of business risk in banking, which is in-

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dicated by the magnitude of the risk of non-performing loans at the bank. When the non-performing loans are low, it can be said that banks are able to carry out their performance effectively and optimally in managing non-performing loans. With the low non-performing loan at the bank, it can be said that bank's performance is improving (Mam- duh, 2004). Non-performing loans show a bank ratio to show the bank's management ability in managing non-performing loans provided by banks.

Bad credit at the same bank can be seen from the percentage of non-performing loans (in the form of substandard credit criteria, doubtful loans, and the presence of bad loans to the total credit to be disbursed). The calculation of the non-performing loan is as follows:

𝑁𝑜𝑛 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑖𝑛𝑔 𝑙𝑜𝑎𝑛 = 𝑇𝑜𝑡𝑎𝑙 𝐵𝑎𝑑 𝐷𝑒𝑏𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 Source: Khaddafi and Syamni (2011)

Loan Deposit Ratio

Loan deposit ratiois the ratio that measures the amount of credit given to the community compared to the amount of funds obtained from the community and using bank's own capital (Zhang, 2015). The ability of banks to refinance withdraw- als made by depositors who rely on credit is a source of liquidity (Darmawi, 2011). The management of the loan deposit ratio is increasing, this condition is caused by banks being able to distribute credit optimally to the public (Hamza and Saadao- ui, 2018). Seeing the bank's ability to manageloan deposit ratio optimally can provide a positive value for the company's performance. The loan deposit ratio is used by the bank companies to see how much funds come from public funds, which gen- erally have a short-term nature and are used to finance credit assets. The greater the value of the loan deposit ratio, the higher the distribution of credit to the public, when compared to the amount of funds that will be received by the bank. Calculati- on ofloan deposit ratio are as follows:

𝐿𝑜𝑎𝑛 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 + 𝑒𝑞𝑢𝑖𝑡𝑦 Source: Messai and Jouini (2013)

Return on Assets

Return on assets is the company's ability to manage its assets optimally, to gain profits for the

company (Kasmir, 2014). The greater the return on assets, the greater the profit the bank will get (Ozili and Uadiale, 2017). The increased profit earned by the bank will have an impact on the better position of the company in managing the assets (Edem, 2017). The return on assets describes the bank's ability from overall capital on company assets, to generate profits. The higher the profit earned by the bank, the higher the return on assets for the bank. ROA can be calculated using a compar- ison between the company's total net profit and total assets owned. Calculations fromasset return are as follows:

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 Source: Suselo et al. (2014)

Stock Return

Return is the level of profit obtained from the owner of capital for an investment that has been made (Yazdanfar and Öhman, 2015). The level of profit obtained by investors, both from short- term and long-term investments with the aim of obtaining profits as a return (Erari, 2014). The increase in the acquisition of stock returns by investors was caused by companies funded by investors running effectively in the company's operational activities to get profits in the first period (Drover et al., 2017). Stock returns are indicated by the level of profit obtained from stock investments made by capital owners or investors. Stock returns can be obtained from the difference in the current period's share price and added the periodic dividends compared to the previous period's stock price. The stock return formula as follows:

𝑅𝑡 = 𝑃𝑡 − (𝑃𝑡 − 1) 𝑃𝑡 − 1 Description:

Rt: return Stock

Pt: Current period share price Pt-1: Previous period stock price Source: Khaddafi and Syamni (2011)

HYPOTHESIS DEVELOPMENT

A non-performing loan is a loan in banks due to credit that is run is substandard or has a bad debt. If the NPL value is low, it will have a maximum effect on banking performance and have an impact on increasing return on assets. This expla-

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286 nation is supported by research conducted by Edo

and Wiagustini (2014), Lafuente et al. (2018), Par- tovi and Matousek (2018), Francis et al. (2018), and Bouheni (2014) which stated that non-performing loans have a significant negative effect on profitability.

H1 : The lower the non-performing loan, the higher the return on assets.

The loan deposit ratio compares the total loans given to the total third-party funds (DPK) that the bank can collect. If the loan deposit ratio increases, the return on assets will also increase. This explanation is supported by research conducted by Ekpu and Paloni (2016), Samad (2015), and Ibra- him (2017) which stated that the loan deposit ratio has a significant positive effect on profitability.

H2 : The higher the loan deposit ratio, the higher the return on assets.

A non-performing loan is when the custom- er cannot pay part or all of his obligations to the bank as mutually agreed. Seeing the development of NPL, which continues to decline, will directly impact increasing stock returns. This explanation is supported by research conducted by Khaddafi and Syamni (2011), Syauta and Widjaja (2009), Umar and Sun (2018), Sood (2017), and Elbadry (2018), which stated that non-performing loans have a significant negative effect on stock returns.

H3 : The lower the non-performing loan, the higher the stock return

Loan deposit ratio shows the higher the credit provided by the bank and will also increase in interest income from the loan, which has an impact on the high profit of the bank concerned, so it can be said that bank's financial performance is increasing, in other words, an increase in loan deposit ratio (LDR) will increase the returns stock. This explanation is supported by research conducted by Khaddafi and Syamni (2011), Graeve et al. (2007), Kurniadi and Mawardi (2012), Zulbetti (2011), and Elbadry (2018), showed that loan deposit ratio has a significant positive effect on stock returns.

H4 : The higher the loan deposit ratio, the higher the stock return

Profitability or the company's ability to earn a profit in the form of a percentage, the increasing

profitability will give a positive value to returns stock. It can be seen from the development of its financial performance, which continues to increase, that company's performance is getting better and directly provides a positive value for returns stock. This explanation is supported by research conducted by McMillan (2017), Che (2018), and Byström (2018), which stated that profitability has a significant positive effect on stock returns.

H5 : The higher the return on assets, the higher the return on stock

Returnonassets(ROA)iscompany'sability to generate profits in the past, then projected future ROA is used as a mediating variable. ROA me- diates the effect of non-performing loans on stock returns. Entering ROA is expected to provide a positive value for stock returns, and this is because thelowernon-performingloanscanincrease ROA and can directly have a positive effect on stock returns. This explanation is supported by research conducted by Lafuente et al. (2018), Partovi and Matousek (2018), Francis et al. (2018), Edo and Wiagustini (2014), and Bouheni (2014) which explained that non-performing loan variables have a significant influence on the profitability and the results of a previous empirical study conducted by McMillan (2017) which explained that profitability has a significant effect on stock returns.

H6 : The lower the non-performing loan, the more stock returns will increase if the return on assets increases as a mediation.

The ability of the bank to manage the loan deposit ratio effectively and optimally shows the bank's performance is improving. It will encourage an increased return on assets at the bank. The greater the profit the bank earns, the more it can positively influence stock returns that will be obtained for investors. This explanation is supported by research conducted by Ekpu and Paloni (2016), Ibrahim (2017), and Samad (2015), which stated that the loan-to-deposit ratio has a significant effect on profitability and the results of a previous empirical study conducted by McMillan (2017) which explained that profitability has a significant effect on stock returns.

H7 : The higher the loan deposit ratio, the more stock returns will increase if the return on assets increases as a mediation.

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Figure 1. Research Conceptual Framework Table 1. Sample of Companies

No Code Name of Bank

1 BMRI Bank Mandiri

2 BBNI Bank BNI

3 BBRI Bank BRI

4 BBTN Bank BTN

5 BBCA Bank BCA

6 BNII Bank Maybank Indonesia

7 BVIC Bank Victoria Internasional

8 BBKP Bank Bukopin

9 BNBA Bank Bumiarta

10 BACA Bank Capital Indonesia

11 BDMN Bank Danamon

12 BSWD Bank of India Indonesia

13 SDRA Bank Woori Saudara Indonesia

14 BABP Bank MNC Internasional

15 BKSW Bank Kesawan

16 BNGA Bank CIMB Niaga

17 MEGA Bank Mega

18 BNLI Bank Permata

19 NISP Bank OCBC NISP

20 PNBN Bank Pan Indonesia

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288 METHOD

The type of data used in this study is secondary data, namely the source of research data obtained indirectly or through intermediary media.

Secondary data include company financial reports from websites www.idx.go.id, www.yahoofinan- ce.com, annual reports, and Indonesian Capital Market Directory (ICMD). This study uses pooled data for the period 2016 - 2018. According to Gho- zali (2011), pooled data is the data that has a com- bination of two elements, namely time series and cross-sectional. Pooled or panel data is obtained by combining time series for three years during the 2016 - 2018 research period and cross-sectional as many as 20 companies so that the number of data observed is 60 observations. The sample of companies in this study can be seen in Table 1.

The method used in this study is path analysis. This research uses IBM SPSS 21.00 statisti- cal application program. The use of path analysis models is to analyze the variables that have a direct or indirect effect, independent variables on the dependent variable. The benefits of the path analysis model are to explain the phenomena studied in predicting the value of the dependent variable (Y) and based on the value of the independent variable (X), for the determinant factor is the determination of the independent variable (X) which has a domi- nant influence on the dependent variable (Y) and can be used to explore the mechanism of the influence of the independent variable (X) on the depen-

dent variable (Y), as well as testing the model using the trimming method.

RESULTS

Hypothesis testing is based on the analyzed significance value of each variable. For this rea- son, path analysis is carried out to determine the influence of variables directly or indirectly (NPL, LDR, and ROA) on the dependent variable. The analysis results can be shown in Table 2 with the help of the SPSS program. Multiple linear regres- sion tests should be performed if the number of independent variables is more than one.

Non-Performing Loans and Profitability Testing the direct effect of non-performing loans on profitability produces a path coefficient of -7,773 with a p-value of 0,000. The test results show that the path coefficient is negative and the p-value < level of significance (alpha = 5%). Thus, non-performing loans have a negative and significant effect on profitability.

Loan Deposit Ratio and Profitability

Testing the direct effect of the loan deposit ratio on profitability produces a path coefficient of 5,214 with a p-value of 0,000. The test results show that the path coefficient is positive and the p-value < level of significance (alpha = 5%). Thus, there is a positive and significant influence of the loan deposit ratio on profitability.

Table 2. The Results of the Analysis of Direct and Indirect Effects

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

NPL -> ROA -.594 .076 -.714 -.7.773 .000

LDR -> ROA .045 .009 .565 5.214 .000

NPL -> Stock Return -.103 .020 -.568 -5.255 .000

LDR -> Stock Return .010 .002 .543 4.924 .000

ROA -> Stock Return .131 .023 .600 5.713 .000

NPL -> ROA -> Stock Return -.038 .027 -.211 -1.436 .047

LDR -> ROA -> Stock Return .004 .002 .256 2.053 .045

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Non-Performing Loans and Stock Returns Testing the direct effect of non-performing loans on stock returns produces a path coefficient of -5.255 with a p-value of 0.000. The test results show that the path coefficient is negative and the p-value < level of significance (alpha = 5%). Thus, non-performing loans have a negative and significant effect on stock returns.

Loan Deposit Ratio and Stock Returns

Testing the direct effect of the loan deposit ratio on stock returns yields a path coefficient of 4,924 with p-value of 0,000. The test results show that the path coefficient is positive and the p-value

< level of significance (alpha = 5%). Thus, there is a positive and significant influence of the loan deposit ratio on stock returns.

Profitability and Stock Returns

Testing the direct effect of profitability on stock returns produces a path coefficient of 5,713 with a p-value of 0.000. The test results show that the path coefficient is positive and the p-value <

level of significance (alpha = 5%). Thus, profitability has a positive and significant effect on stock returns.

The Effect of Non-Performing Loans on Stock Returns through Profitability (Mediation)

The influence of non-performing loans on stock returns through profitability produces a path coefficient of 1.436 with a p-value of 0.047. The test results show that the path coefficient is negative and the p-value < level of significance (alpha

= 5%). Thus, non-performing loans have a negative and significant effect on stock returns through profitability. It means that profitability acts as a partial mediation of the effect of non-performing loans on stock returns.

Effect of Loan Deposit Ratio on Stock Return through Profitability (Mediation)

The influence of the loan deposit ratio on stock returns through profitability produces a path coefficient of 2.053 with a p-value of 0.045. The test results show that the path coefficient is positive and the p-value < level of significance (alpha

= 5%). Thus, it means that there is a positive and significant influence of the loan deposit ratio on stock returns through profitability. It means that

profitability acts as a partial mediation of the effect of the loan deposit ratio on stock returns.

DISCUSSION

Non-Performing Loans and Return on Assets Non-performing loans are used to measure the ability of bank management to manage non- performing loans given by the bank to the public.

In credit management, some risks are accepted by the bank, including the risk to the bank's business resulting from uncertainty in repaying or the debt- or's substandard return of credit. Managing credit well encourages credit quality to be more efficient.

It impacts decreasing non-performing loans and affects the profitability obtained by banks (Fahmi, 2012). Higher profitability has an impact on bank performance for the better because banks can manage non-performing loans well (Hasibuan, 2011).

Dendawijaya (2005) stated that in the presence of non-performing credit conditions, banks could lo- se opportunities to obtain income from channeling loans. It can reduce profits and negatively affect bank companies' profitability (ROA) and profitability.

The lower non-performing loan at the bank will increase the profit the company earns. This explanation is in line with and proven by the results of this study which show that non-performing loans have a significant negative effect on profitability.Theseresultsaresupportedbytheresults of research conducted by Lafuente et al. (2018), Edo and Wiagustini (2014), Partovi and Matousek (2018), Francis et al. (2018), and Bouheni (2014) which state that non-performing loans have a significant negative effect on profitability. This statement shows that in recent years, banks have been able to extend credit to public optimally. It can be seen from the lower interest rates on loans, which can encourage people to obtain loan funds from banks, which can be used to carry out their productive activities. The increasing distribution of credit to the public can affect the operational activities of the bank. It has an impact on the performance of bank companies to become more optimal.

Loan Deposit Ratio and Return on Assets According to Dia and Hoose (2019), the loan deposit ratio measures the level of a bank's ability to repay deposits due to their depositors. It can fulfill the credit requests submitted without delay.

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290 Managing credit to banks effectively can increase

bank interest income. It has an impact on increasing profits and indicates more significant profit growth (Taswan, 2010). The increase in profits earned by banks results from bank performance that works optimally in managing the LDR ratio well.

The higher the loan deposit ratio, the higher the profitability. It is hoped that this statement will increase the bank's loan deposit ratio to increase the profit earned by the bank. This explanation is in line with and proven by the results of this study which show the loan deposit ratio has a significant positive effect on profitability. These results are supported by the results of research conducted by Ekpu and Paloni (2016), Samad (2015), and Ibra- him (2017), which stated that the loan deposit ratio has a significant positive effect on profitability.

Based on this statement, it shows that the greater the funds collected by banks from the public. The greater the distribution of loan funds to the public, the bank's profit will increase. It can be seen from the increasingly effective banks in the channeling third-party funds in the form of credit to the public, which can become a source of liquidity for banks. With the increase in lending, the impact on the profitability obtained by the bank is increasing.

So the higher the number of funds to be channeled to customers in the form of credit, the total amount of unused funds at the bank will decrease and can result in an ever-increasing interest income.

Non-Performing Loans and Stock Returns Non-performing loans show the ability of bank management to manage non-performing loans disbursed by banks. The lower the bank's credit level, the better its assets' quality. It gives a good signal to investors because investors think that banks can manage the credit they distribute properly. Therefore, in managing NPLs, the bank continues to carry out the principle of the prudence and effectively extends credit to people who need funds. The lower risk of non-performing loans can increase profits for bank and shareholders (Fahmi, 2012). Non-performing loans indicate the health of a bank's asset quality, so it becomes a consider- ation for investors to invest (Taswan, 2010).

The lower the non-performing loan, the higher the stock return. Based on this statement, the lower non-performing loan at the bank is expected to increase the return obtained by investors on the

capital market. This explanation is in line with and proven by the results of this study which show that non-performing loans have a significant negative effect on stock returns. These results are supported by the results of research conducted by Khaddafi and Syamni (2011), Syauta and Widjaja (2009), Umar and Sun (2018), Sood (2017), and Elbadry (2018), which stated that non-performing loans have a significant negative effect on stock returns.

This result is because banks can extend credit to the public effectively and efficiently. The lower value of non-performing loans causes this condition and encourages the people to obtain loans from banks, which can be used to carry out productive activities. Increasing lending to the public makes bank activities run more optimally so that the impact on bank performance is getting better. This condition is also supported by customers paying loan installments to banks in a timely manner and transparency in bank credit management. The decrease in the NPL ratio makes the credit turnover better. It can affect the increase in profits obtained by banks. Increasing profits at the bank can affect the increase in returns obtained by investors on the stock market so that other investors respond to invest their capital.

Loan Deposit Ratio and Stock Returns Shah et al. (2019) stated that a high loan deposit ratio indicates a lot of funds being channeled to the public in the form of credit. It intends to gain profit from loan interest. The increasing profit earned by the bank has a direct impact on bank performance. This condition is supported by the increasing demand for credit by the public for banks.

It can affect investors' judgment in making an investment decision so that simultaneously it can affect the demand for shares in the capital market, which has an impact on increasing the stock prices and affecting the growth of stock returns (Ruslim, 2011).

The higher the loan deposit ratio, the higher the stock price. This statement can be explained by the fact that an increase in the loan deposit ratio will increase the return from investors in the capital market. This explanation is in line with and proven by the results of this study which show the loan deposit ratio has a significant positive effect on stock returns. These results are supported by the results of research conducted by Khaddafi and

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Syamni (2011), Zulbetti (2011), Kurniadi and Ma- wardi (2012), Elbadry (2018), and Graeve et al.

(2007) showed that the loan deposit ratio has a significant positive effect on stock returns. Based on this statement shows that banks can absorb funds from the public effectively. It can be seen from the more optimal banks in carrying out credit distribution to the community, and the bank's profit is increasing. Increasing effective lending has an impact on increasing profits earned by banks. This condition can be interpreted that the acquisition of high profits is the result of increasingly optimal bank performance and can increase public trust, which in turn increases banking stock prices and has a positive influence on increasing the stock returns owned by banks. An increase in the loan deposit ratio gives a good signal to investors for the estimated return they get and can attract other investors to invest in bank companies.

Return on Assets and Stock Returns

Profitability is used as a measure of management's ability to earn a profit, which is genera- ted from the total assets owned by the bank. The greater the profitability, the greater the profit level the bank obtains. Based on the research results of Ebert and Griffin (2006), an organization produces goods and services to make a profit. The better the level of effectiveness of bank management, it can increase the profitability of sales and investment income (Kasmir, 2014). Increasing bank profits can give investors better returns (Tandelilin, 2010). The increase in profitability is an assess- ment for investors as good information and shows that bank management can utilize their assets to get high profits.

The higher the profitability, the higher the stock return. The statement is expected that the more effective the bank's operational activities can have an impact on increasing profitability. Increa- sed profitability can be said that bank performance can run optimally to affect the price of bank shares on the Indonesian stock exchange, which is increasing. These conditions have a direct effect on increasing returns for investors. This statement is expected to increase profitability and can increase the returns obtained by investors in the capital market. This explanation is in line with and proven by the results of this study which show profitability has a significant positive effect on the stock re-

turns. These results are supported by the results of research conducted by McMillan (2017), Byström (2018), and Che (2018), which stated that profitability has a significant positive effect on stock returns. This statement shows that the bank management can utilize assets owned effectively, to obtain high profits. Increased profitability at banks because banks can fulfill their obligations to be paid immediately, the capital they have to finance the bank's operational activities, and the ability to perform management efficiently, are the determining factors in increasing profitability. The acquisition of high profits indicates that the bank's performance is more optimal. It has an impact on increasing sharepricesontheIndonesianstockexchange.The increase in stock prices also affects the increase in returns obtained by investors. Increasing stock returns on banks can provide more comprehensive confidence to other investors to invest their capital. These conditions make investors more interes- ted in investing in companies that effectively generate high profits. Increasing company profits means that the company's operational and financial strength is getting better so that it has a positive effect on equity.

The Effect of Non-Performing Loans on Stock Returns through Return on Assets (Mediation) Pop et al. (2018) stated that the lower the non-performing loan, the stock return will increase. This statement is due to the lower management of bad loans, and the quality of the assets owned by the bank is running effectively. The decline in non-performing loans at banks was driven by the more effective management of credit distributed to the public, customers could make payments on time, and banks always adhered to the principle of prudence in extending credit to the public. The decrease in non-performing loans shows that banks have succeeded in managing the non-performing loans effectively and efficiently so that bank management can increase its profitability, Mishkin (2011).

Increased profitability occurs because bank management can manage the productivity of its assets effectively. Profitability is proxied using the return on assets measured to generate profits through bank company assets. Increased profit gain indicates that the bank's performance is running optimally, resulting in an increase in stock prices on

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increase in stock prices has an effect on increasing the returns obtained by investors and providing a greater level of confidence in other investors to invest in banking. Increased profits earned by the bank can be used as a strength in carrying out its operational activities and positively influence shareholders. Seeing this statement follows the results of this study that profitability is able to mediate the effect of non-performing loans on stock returns.

Profitability that can mediate the effect of non-performing loans on stock returns is due to a decrease in non-performing loans. The better the credit quality at the bank, the more effective the bank's operational activities will be and can increase the profitability obtained by the bank. With the increase in profitability obtained by the bank, the bank's performance can be said to be more optimal, so it will have an impact on increasing the value of shares and returns obtained by investors.

This study expands on the previous empirical study conducted by Lafuente et al. (2018), Par- tovi and Matousek (2018), Francis et al. (2018), Edo and Wiagustini (2014), and Bouheni (2014) which explained that non-performing loan variables have a significant influence on profitability and the results of a previous empirical study conducted by McMillan (2017) which explained that profitability has a significant effect on stock returns.

The Effect of Loan Deposit Ratio on Stock Re- turns through Return on Assets (Mediation)

The higher the loan deposit ratio, the stock return will increase if profitability increases as a mediation. This statement is due to the increase in effective bank lending to the public, and this is based on bank management working optimally in using its assets to generate net profit from its activities, Harahap (2013). The increase in profits earned by the bank indicates that the bank's performance is working effectively and efficiently.

The better the ratio of loan deposit ratio in banking, the more positive impact on profitability.

Increasing bank profitability is shown through efficiency and optimal bank performance in gaining profits. Profitability is proxied by the return on assets which measures the effectiveness in generating profits through the assets owned by the company to generate profits from the invested ca-

pital. The higher the profit the bank achieves, the better the bank's position in using assets. Increased profitability shows that the bank management can work more optimally in generating the profits, this condition can increase investor interest in investing in bank companies in the capital market, and this impacts increasing stock returns in banking, Darmawi (2011). Seeing this statement is in accor- dance with the study results that profitability can mediate the effect of the loan deposit ratio on stock returns.

Profitability is able to mediate the effect of the loan deposit ratio on stock returns because the loan deposit ratio is one of the short-term liquidity risks, so banks should fulfill their liquidity in a short time so that the level of financial soundness is maintained. The more the level of financial soundness is maintained, the bank's operational activities become effective and can increase the bank's profitability. With the increase in profitability obtained by the bank, the bank's performance can be said to be more optimal, so it will have an impact on increasing the value of shares and returns obtained by investors. This study expands on previous empirical studies conducted by Ekpu and Pa- loni (2016), Ibrahim (2017), and Samad (2015), which stated that the loan-to-deposit ratio has a significant effect on profitability and the results of previous empirical studies conducted by McMil- lan (2017) which explained that profitability has a significant effect on stock returns.

IMPLICATIONS Theoretical Implications

Non-performing loan, loan deposit ratio is a bank's financial ratio to assess its performance.

These financial ratios have a purpose to determine the bank's ability to optimize the level of lending to the public, generate profits from the activities carried out and reject the risks from its operational activities. The bank's financial ratios are improving, which can give a positive value to their performance.

Practical Implications

The results of this study practically have a relationship with stock returns. Investors can consider the condition of the bank's financial ratios as the basis for making investments. This study reve- als that the Non-Performing Loans have a negative

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and significant effect on Return On Assets due to a decrease in NPL values to an increase in Return On Assets. The loan deposit ratio variable also has a positive and significant effect on the return on assets, and this shows that an increase in the LDR value directly increases the return on assets following the law on banking related to guidance and supervision that banks are required to maintain a bank's soundness level following the adequacy provisions, capital, asset quality, management quality, liquidity, profitability, solvency, and other aspects related to bank business. The non-performing loan variable has a negative and significant effect on stock returns. It is due to decreased NPL value, which directly increases stock returns. The loan deposit ratio variable also has a positive and significant effect on stock returns. This result is because the LDR value increases, and the stock return increases.

The analysis results of the return on assets variable have a positive and significant effect on stock returns. It can be seen from the increase in return on assets; stock returns also increase directly. For the results of the analysis of the variable non-performing loans have a negative and significant effect on stock returns through return on assets as a mediation, these results indicate that a decrease in the value of NPL has an impact on increasing return on assets and directly affects the increase in stock returns. The loan deposit ratio variable results have a positive and significant effect on stock returns through return on assets as a mediation, indicating that an increase in the LDR ratio can increase return on assets and directly affect stock returns. For banking companies, the findings of this study can be used in policy-making related to the delivery of information on bank performance reports to investors. These results can be used to conduct similar research, especially those related to banking stock returns.

RECOMMENDATIONS

Banks continue to pay attention to the condition of the NPL value. It can have a direct impact on their performance in generating profits. The better the management of NPL in bank, the more positive value it can give to stock returns. Inves- tors or capital owners still pay attention to NPL and LDR because these ratios can directly influence profit gain on bank performance. The more ef-

fective and optimal in managing ratio of NPL and LDR, the greater the return obtained by investors.

CONCLUSIONS

Non-performing loans have a negative and significant effect on return on assets at commercial banks listed on the IDX. Loan deposit ratios have a positive and significant effect on returns on assets at commercial banks listed on the IDX.

Non-performing loans have a negative and significant effect on stock returns at commercial banks listed on the IDX. Loan deposit ratios have a positive and significant effect on stock returns in commercial banks listed on the IDX. Return on assets has a positive and significant effect on stock returns at commercial banks listed on the BEI. Non- performing loans have a negative and significant effect on the stock returns through return on assets (mediationvariable)incommercialbankslistedon the IDX. Loan deposit ratio has a positive and significant effect on stock returns through return on assets (variable mediation) at commercial banks listed on the IDX.

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