The Determinant of Price Earning Ratio: Evidence from the Indonesian Banking Sector

Abstract

Banking plays an important role in developing a country's economy. In addition to conducting the banking intermediation function, it is also required to create profits. To create profits, capital is needed through the Indonesian capital market. Investors buy banking shares in the hopes of obtaining dividends and capital gains. Even though investors buy blue chip shares, the investment risk remains. Therefore, investors must understand the concept of Price Earning Ratio (PE ratio or PER) to minimize the risk when buying and selling blue chip and non-blue chip banking shares. This study is about the factors that influence the PE ratio of blue chip and non-blue chip banking shares in Indonesia. This study uses data from 2007 to 2016 with a sample of sixteen banks listed on the Indonesia Stock Exchange (IDX) consisting of four blue chip banks and twelve non-blue chip banks. The results of this blue chip model study show that cost to income ratio, loan to deposit ratio, net interest margin, dividend payout ratio, non-performing loan, loan to asset ratio, inflation, and interest have a significant effect on PE ratio with R-squared 0.80. The results of this non-blue chip model study show that return on assets, cost to income ratio, loan to deposit ratio, non-performing loan, loan to asset ratio, inflation, and interest have a significant effect on PE ratio with R-squared 0.67.