Operational Efficiency across Bank Size Regimes: Evidence from Indonesian Private Banks
Burhanuddin Jauhari, Sunardi, Harmono
Universitas Merdeka Malang
The banking industry is experiencing increasing pressure from digital transformation, intensifying fintech competition, rising operating costs, and changing market conditions, making operational efficiency a critical determinant of sustainable profitability. However, previous studies predominantly assume a linear relationship between operational efficiency and profitability or treat bank size as a constant moderating variable, overlooking the possibility that efficiency effects differ across organizational scales. This study aims to examine the impact of operational efficiency on profitability and investigate whether the relationship varies across bank size regimes among Indonesian private banks. The analysis employs quarterly panel data from 34 Indonesian private banks over the period 2021Q1–2024Q4, comprising 544 bank-quarter observations after applying 2% winsorization. Fixed effects estimation is used as the baseline model, followed by a linear moderation model and a regime-based fixed effects model that distinguishes small, medium, and large banks, with robustness assessed using alternative panel estimators. The findings reveal that A lower BOPO ratio, indicating greater operational efficiency, is associated with higher bank profitability. Nevertheless, the linear moderation model fails to capture size heterogeneity, whereas the regime-based approach demonstrates that The findings reveal a significant relationship between BOPO and bank profitability. While the linear moderation model does not fully capture size-related heterogeneity, the regime-based analysis reveals substantial differences in the magnitude and direction of the BOPO–profitability relationship across small, medium-sized, and large banks. The study contributes by introducing a regime-dependent perspective that integrates Efficiency Structure Theory, Economies of Scale Theory, and Organizational Complexity Theory to explain bank size heterogeneity. Although the analysis is limited to Indonesian private banks, future research may extend this framework to cross-country settings, alternative profitability measures, and dynamic nonlinear panel models.
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