Retained-Earnings Capacity and Risk-Adjusted Bank Performance: Evidence from Indonesian Banks

Abstract

Aims: To evaluate the association between retained earnings relative to equity (retained-earnings capacity) and Risk-Adjusted Return on Capital (RAROC) among listed Indonesian conventional banks. Study Design: Quantitative longitudinal study using balanced panel data. Place and Duration of Study: Seventeen conventional banks listed in Indonesia, observed annually from 2013 to 2024. Methodology: An annual balanced panel of 17 banks (2013–2024; 204 bank-year observations) is analysed using a random-effects specification with bank-specific operating indicators and annual monetary variables. Retained earnings/equity is the focal predictor. The reported estimates rely on model-based standard errors, and the available measurement documentation does not fully specify the RAROC risk-capital calculation. Results: Retained-earnings capacity is positively associated with RAROC (b = 0.1439, SE = 0.0481, model-based p = .003; standardised β = 0.242). Technology expenditure intensity, loan-to-deposit ratio, nonperforming loans, the agency-cost proxy, and leverage do not reach the 5% significance level. The policy rate has a positive coefficient, and annual rupiah depreciation has a negative coefficient, but inference on these time-varying covariates is especially sensitive to their limited number of distinct annual observations. Conclusion: Retained earnings/equity shows a positive conditional association with risk-adjusted performance in the analysed sample. This relationship should not be interpreted causally: the contemporaneous design, a potentially shared equity denominator, extreme observations, and incomplete information on economic-capital measurement and panel dependence limit the strength of inference.