Intrinsic Value Equity Determinants through Banking Profitability in

Indonesia Stock Exchange

Syally Dwi Andrina Nst

, Fachrudin

and Isfenti Sadalia

Master of Property Management and Valuation Program, Universitas Sumatera Utara, Medan, Indonesia

Management Department, Faculty of Economics and Business, Universitas Sumatera Utara, Medan, Indonesia

Keywords: Capital Adequacy Ratio, Non-perfoming Loans, Net Interest Margin, Return on Equity, Free Cash Flow to

Equity.

Abstract: The purpose of this research was to find out and analyze the influence of Capital Adequacy Ratio, Non-

perfoming Loans and Net Interest Margin on the intrinsic value of equity with profitability as an intervening

variable in banking sector companies in Indonesia Stock Exchange. The intrinsic value of this equity was

the net present value of the projected Free Cash Flow to Equity (FCFE). The population was selected by the

target population with 30 samples of companies. Hypothesis testing technique using path analysis using

SPSS at 5% alpha value. The results of this study indicate that 1) the CAR has a negative and significant

effect on profitability, 2) NPL has a negative and significant effect on profitability, 3) NIM has positive and

significant effect on profitability, 4) CAR has positive and insignificant effect on equity intrinsic value.

1 INTRODUCTION

The capital market is one of the few investment

instruments that are much in demand by the public.

Investment is the placement of the funds at this time

hoping to generate profits in the future. Investors in

making decisions need important information as the

base for determining investment choices. Investment

decision is very important because to obtain the

optimum return and avoid losses (Fachrudin, K.R. &

Amalia, 2016). Understanding the stock market

according to the Capital Market Law No. 8 in 1995

the activity concerned with the public offering and

trading of securities, public companies relating to

securities issuance, as well as professional

organizations related to securities. One of the much-

loved instrument in the capital market is stock.

Shares in Darmadji T. (2001) is a unit of value or

book keeping in a variety of financial instruments

referred to under the ownership of a company.

Investors who invest in the stock, of course, have the

expectation that if the investment would be surplus /

profit.

There are two benefits received by investors

when investing in stocks, namely in the form of

dividends and capital gains (Anorage, 2006).

Dividend is the company's operating profits are

distributed to investors, while the capital gain is the

positive difference between the purchase price by

selling stock price. After that, to succeed for

investing stocks, do not need a high IQ, because

according to Buffet (2003) that the needed for

investing stocks is a framework for making

decisions and the ability to keep emotions from an

analytical framework so that investors have a clear

reason and rational to the shares to be purchased,

always disciplined for what has been planned, as

well as dampen the emotional factor in the making

investment decisions.

For investing stocks investor can be expects to

forecast stock prices that will be formed in the

future. Therefore, we need a method of analysis that

can support the investor's expectations. Moreover

this method of analysis is also useful to anticipate

the possibility that will happen, the intention is to

use stock analysis, if the results of the stock

assessment is positive, then the investor can be

assured against expectations stocks going forward,

and if the result of judgment is negative, investors

can minimize the chances losses that would arise if

you buy the stock.

Motivation to perform stock valuation according

to Hoover (2006) is extremely diverse. In addition to

the benefit of trade, as well as to establish an

effective economic policy, or to understand better

422

Andrina Nst, S., Fachrudin, . and Sadalia, I.

Intrinsic Value Equity Determinants through Banking Proﬁtability in Indonesia Stock Exchange.

DOI: 10.5220/0009904000002480

In Proceedings of the International Conference on Natural Resources and Sustainable Development (ICNRSD 2018), pages 422-427

ISBN: 978-989-758-543-2

manage the company, and can be beneficial to

convey accurate information to the public.

Additionally assortment are also people who use

stock valuation, ranging from people in the company

that manages company up to economists to manage

the economy.

Now there are several valuation methods useful

to facilitate investors to analyze stocks, one of which

is the Discounted Cash Flow Model approach is to

approach the valuation of Free Cash Flow to Equity

(FCFE) against the shares of banking companies

(Ariyanto, 2012). Definition FCFE by Pinto (2010)

is the cash flow available to shareholders after all

operating expenses, interest and principal payments

have been paid. In addition, the selection of

valuation models such FCFE because every

company must have cash flow is the result of the

company's operations, be it negative or positive cash

flow, so they better reflect the actual condition of the

company.

The main purpose of the bank's operations is to

achieve the maximum level of profitability.

Profitability is the ability of banks to earn profits

effectively and efficiently. Profitability used is

Return on Equity (ROE) because it can take into

account the ability of the bank's management in the

net profit of the company. The level of profitability

with ROE approach aims to measure the ability of

bank management to manage the assets it controls to

generate income (Rangga, 2013).

Several factors are thought to affect the

profitability and stock prices are Capital Adequacy

Ratio (CAR), which is a financial ratio that shows

how much the entire assets of the bank that contain

risks (credit, investments in securities, bills to other

banks) is also funded by the bank's capital itself, in

addition to obtaining funds from sources outside the

bank, such as public funds, borrowing (debt), and

others (Dendawijaya, 2005).

Second factor that is expected to affect the

profitability and stock prices is Non Performing

Loan (NPL), which is a ratio used to measure the

ability of banks to cover the risk of failure of loan

repayment by the debtor (Darmawan, 2004). Bank

said to have a high NPL if the number of troubled

loans is greater than the amount of credit granted to

debtor. If a bank has a high NPL, it will increase

costs, better asset allowance and other costs, in other

words higher NPL bank, then it will affect the

performance of the bank (Masyhud, 2006).

A third factor that is expected to affect the

profitability and stock price is Net Interest Margin

(NIM). In the banking world, the Net Interest

Margin (NIM) is a measure to distinguish between

the interest income earned your bank or financial

institution, the amount of interest that is given to the

lender. NIM itself aims to evaluate the bank for

managing the various risks that may occur in interest

rates. High profits gained from the ordinary banking

market in Indonesia has become one of the many

factors triggering the acquisition of local banks by

foreign banks due to net interest margin of banks in

Indonesia is the highest in Asia (A. Prasetyantoko,

2012). Thus the amount of NIM will affect the

Bank's profit and loss that ultimately affect the

performance of the bank.

Based on the phenomenon and background that

have been revealed, so authors would like to re-

examine the fundamental factors of companies and

know how to influence the CAR, NPL, NIM, to

profitability as measured by ROE, and the effect on

the intrinsic value of the equity. The title of the

research to be performed is "Determinants of

Intrinsic Value Equity Banking Profitability

Through Indonesian Stock Exchange".

Based on the background and the formulation of

the problem that has been raised that the conceptual

framework of this study is illustrated in Figure 1.

Figure 1: Conceptual Framework Research.

2 METHODOLOGY

Type of research is descriptive research which is a

type of research that aims to describe the systematic,

factual and accurate about the facts and the

properties of an object or a particular population.

The population in this study using banking

companies listed on the Stock Exchange during the

period of the study period 2014 - 2016 a total of 39

companies, criteria of the sample by using specific

criteria that banking companies listed in the period

of 2014 or earlier, have a complete financial

statement at the time of the study, banks had record

profits in the study period 2014-2016, so we get the

total sample of 30 companies in the study period.

Intrinsic Value Equity Determinants through Banking Proﬁtability in Indonesia Stock Exchange

423

Source of the data obtained from the

Indonesia Stock Exchange's website

(www.idx.co.id), In the form of the company's

annual financial statements published in the study

period, namely 2016 The analysis technique used

path analysis (path analysis), which is a method for

analyzing the effects (direct effect) and indirect

effects (indirect effects) of the variables measured

(Ghozali, 2009).

Stages in conducting the research method of Free

Cash Flow to Equity (FCFE) are as follows:

1. Calculating the Cost of Equity

2. Counting FCFE

3. Measuring growth FCFE

4. Calculate the intrinsic value

3 RESULTS AND DISCUSSION

3.1 Substructure Testing First

1. Residual Normality Test Kolmogorov-Smirnov

test statistic of data Asymp. Sig. (2-tailed) of

0543 (> 0.05) and points (residual emission)

spread around fine lines, which indicates that the

normality assumption is met.

2. test Heteroscedasticity

With Glejser test found that the significant value

of t test is greater than 5% alpha which indicates

that data is free from the problem of

heteroscedasticity.

3. test multicollinearity

Coefficients

Model Collinearity Statistics

Tolerance VIF

(

Constant

)

CAR

.802 1.247

NPL

.881 1.135

NIM .854 1.171

a. Dependent Variable: ROE

Tolerance value of each variable is greater than

0.1. VIF value smaller than 10. This shows that there

is no multicollinearity.

4. The coefficient of determination (R2)

The coefficient of determination is worth 0353

which means that ability of the model to explain

variations in variable profitability amounted to

35.3%, while the remaining 64.67% explained by

other variables not included in the model.

5. Simultaneous Significance test (test F)

Significance test F is 0.009. Values smaller than

5% alpha indicates that the model used feasible

and can be used for further analysis.

6. Individual Parameter Significance test (t-test)

CAR variable negative and significant with p-

value 0.011 (<0.05) on ROE. NPL variable

negative and significant with p-value 0.029

(<0.05) on ROE. While the NIM variable

positive and significant with p-value 0.004

(<0.05) on ROE.

The mathematical equation model of lane 1:

𝒀𝟏 = −𝟎,𝟒𝟖𝟒𝑿𝟏 − 𝟎,𝟑𝟖𝟕𝑿𝟐 +

𝟎,𝟓𝟑𝟐𝑿𝟑 + 𝜺

(1)

3.2 Substructure Testing Second

1. Residual Normality Test

Kolmogorov-Smirnov test statistic of data

Asymp. Sig. (2-tailed) of 0201 (> 0.05) and

points (residual emission) spread around fine

lines, which indicates that the normality

assumption met.

2. test Heteroscedasticity

With Glejser test found that the significant value

of t test is greater than 5% alpha which indicates

that the data is free from the problem of

heteroscedasticity.

3. Test multicollinearity

Coefficients

Model Collinearity Statistics

Tolerance VIF

(Constant)

CAR .621 1.609

NPL .731 1.367

NIM .621 1.609

ROE .647 1.547

a. Dependent Variable: Nilai Intrinsik Ekuitas

Tolerance value of each variable is greater than

0.1. VIF value smaller than 10. This shows that

there is no multicollinearity.

4. The coefficient of determination (R2)

The coefficient of determination is worth 0493

which means that ability of the model to explain

variations in the variable profitability amounted

to 49.3%, while the remaining 50.7% explained

by other variables not included in the model.

5. Simultaneous Significance test (test F)

Significance test F is 0.001. Values smaller than

5% alpha indicates that the model used feasible

and can be used for further analysis.

ICNRSD 2018 - International Conference on Natural Resources and Sustainable Development

424

6. Individual Parameter Significance test (t-test)

CAR variable positive and not significant with p-

value 0.577 (> 0.05) of the intrinsic value of

equity. NPL variable positive and not significant

with p-value 0.342 (> 0.05) of the intrinsic value

of equity. NIM variable positive and not

significant with p-value 0.004 (> 0.05) of the

intrinsic value of equity. While ROE positive and

significant with p-value 0.000 (<0.05) of the

intrinsic value of equity.

Coefficients

Unstandardized Coefficients

Coeffici

ents

del

B Std. Error Beta

t Sig.

(Con

stant

)

-661939.850 470222.055

-1.408 .172

CAR 1.074E6 1.899E6 .102 .566 .577

NPL 4.793E6 4.949E6 .161 .968 .342

NIM 406384.906 6.565E6 .011 .062 .951

ROE 6.992E6 1.693E6 .732 4.131 .000

a. Dependent Variable: Nilai Intrinsik Ekuitas

The mathematical equation model of lane 1:

𝒀𝟐 = 𝟎,𝟏𝟎𝟐𝑿𝟏 + 𝟎,𝟏𝟔𝟏𝑿𝟐 +

𝟎,𝟎𝟏𝟏𝑿𝟑 + 𝟎,𝟕𝟑𝟐𝒀𝟏 + 𝜺

(2)

3.3 Discussion

3.3.1 Effect of Capital Adequacy Ratio,

Non-perfoming Loan and Net Interest

Margin on Profitability

Their negative influence on profitability between

CAR means that the higher the CAR can decrease

the value of profitability (ROE). This is because the

bank-owned capital is not managed effectively

because the value of risky assets (RWA) in the

company that became the sample is larger than the

amount of capital used to fund such that the ratio of

RWA CAR reduced profitability (ROE). The

amount of RWA shows that the expansion of the

company's valuable assets owned large so that the

risk too great, it can reduce profitability.

From the statistical test result that non-

performing loans have a negative impact on

profitability. If the lower non-performing loans it

gives an indication that the level of risk on bank

lending in low enough that the bank will have the

advantage (Rahim and IRPA, 2008). Non

Performing Loan (NPL) will cause the loss of

opportunity to earn (income) of loans, thereby

reducing profits and reduced ability to lending

activities. The number of non-performing loans also

makes the bank did not dare to increase lending.

Among the positive influence on profitability

NIM means that the higher the value of the NIM can

increase the value of profitability. According

Almilia and Herdiningtyas (2005), the greater the

ratio of net interest margin earned by banks will

increase interest income on earning assets managed

by the bank so that the possibility of the bank in a

smaller risk conditions. Net interest margin is

strongly influenced by interest rates, therefore the

net interest margin is used as an evaluation of the

banking addressing risk management. When interest

rates are rising the interest expense and interest

income will go up so it can see the ability of banks

to earn interest income from loans granted.

3.3.2 Effect of Capital Adequacy Ratio,

Non-perfoming Loans, Net Interest

Margin and Profitability against

Intrinsic Value Equity

Statistical test results showed that the variable CAR

positive effect on the intrinsic value of equity, this

means that every variable CAR will increase the

intrinsic value of the equity. Due to the higher value

of CAR means the company has sufficient capital to

maintain the likelihood of the risk of losses resulting

from the movement of bank assets which basically

originates mostly from third party funds.

In this study resulted that the NPL a positive

impact on the company's intrinsic value. This

condition implies despite the higher NPL value does

not give effect to lower the intrinsic value of equity.

This is because Allowance for Assets (PPAP) is still

able to cover credit problems. Banking earnings may

still increase with the NPL are high because banks

are still able to obtain a source of income, not only

of interest but also of other income sources such as

fee-based income also gives effect is high relative to

the increase in the intrinsic value (Nurus, 2017).

The results of this study showed that NIM have a

positive effect and not significant to intrinsic value

of the equity. This is because of high NIM caused by

banks that had business focused on UMKM credit

and micro with same ratio (Hаssim, and Indiаni,

2016). Known that in Indonesia the main banks

revenue from credit interest income. Of course, the

microfinance of the community as long as there is no

need for the fewer unhealthy people, it is only that

they may overstay. Higher NIM can not afford to

have a lot of good because high NIM are prompted

with a good operating system.

This study showed that ROE have a positive

effect and significant through intrinsic value of

equity. The results showed investors does overview

Intrinsic Value Equity Determinants through Banking Proﬁtability in Indonesia Stock Exchange

425

of a company by looking at the financial ratios such

as an evaluation tools investments, because of the

high financial ratios reflect its lower firm value. If

investors want to see how much the company earns a

return on investment that they cultivate, which will

see first is profitability ratios.

3.3.3 Indirect Effect of Capital Adequacy

Ratio, Non-perfoming Loan, and the

Net Interest Margin of the Intrinsic

Value Equity through Profitability

The results showed indirect effect of the intrinsic

value of equity CAR through profitability amounted

to -0.3542 and significant (0.0223 < 0.005). This

indicates that direct effect of intrinsic value of equity

CAR smaller than indirect effect of intrinsic value of

equity CAR through profitability. This means that

with increasing profitability or company's ability to

earn a return may affect CAR in increasing intrinsic

value of equity.

The results showed indirect effect of intrinsic

value of equity NPL through profitability amounted

to -0.2833 and not significant (0.0768 > 0.005). This

indicates that direct effect of NPLs of intrinsic value

of equity is greater than indirect effect of intrinsic

value of equity NPL through profitability. This

means that with increase in profitability can affect

NPL in increasing intrinsic value of equity. So that

means bigger the problem loans that pose a bank do

not want to do too much credit, thereby reducing the

amount of credit granted by banks which will reduce

the amount of a bank's profits and ultimately lowers

value of the company.

The results showed indirect effect of intrinsic

value of equity NIM through profitability amounted

.3894 and significant (0.0128 < 0.005). This

indicates that direct effect of intrinsic value of equity

NIM smaller than indirect effect of intrinsic value of

equity NIM through profitability. This means that

with increasing profitability or company's ability to

earn a return may affect NIM in increasing the

intrinsic value of equity.

4 CONCLUSIONS

Based on the research conducted, it can be

concluded as this:

1. Capital Adequacy Ratio a significant negative

effect on profitability.

2. Non-perfoming Loan a significant negative

effect on profitability.

3. Net Interest Margin positive and significant

impact on profitability.

4. Capital Adequacy Ratio and no significant

positive effect on the intrinsic value of the

equity.

5. Non-perfoming Loan and no significant

positive effect on the intrinsic value of the

equity.

6. Net Interest Margin and no significant positive

effect on the intrinsic value of the equity.

7. Profitability positive and significant effect of

the intrinsic value of equity.

8. Capital Adequacy Ratio a significant negative

effect on the intrinsic value of the equity

through profitability.

9. Non-perfoming Loan and no significant

negative effect on the intrinsic value of the

equity through profitability.

10. Net Interest Margin positive and significant

impact on the intrinsic value of the equity

through profitability.

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