Determinants of the Price Earning Ratio and Corporate Governance in the Indonesian Banking Industry

Introduction

The banking industry occupies a strategically important place in the economy of Indonesia considering its importance for financial intermediation through collecting money from the public and returning the same money back in the form of finance and credits. This function is performed efficiently not only because of the efficiency of operations but also because of the public trust to the banks. From the capital markets viewpoint, the PER is among the valuation ratios that are often used to measure the market’s view of the ability of an organization to earn profits as well as its growth expectations (Neldi et al., 2023). PER is not just an indicator that shows the ability of the company to earn money, but it also indicates the degree of management’s efficiency, chances for future growth, and the degree of risk associated with the activities of the company.

In recent times, the PERs of the banking issuers on the IDX have been experiencing fluctuation due to economic factors both nationally and internationally. The above clearly shows that the formation of PER is influenced by not only variations in stock prices but also other fundamental company factors. Profitability, as measured by ROA, ROE, and EPS, is one of these factors that can indicate the capability of a bank in earning profits (Angga & Dermawan, 2023). Banks with high profitability will be valued more by investors, which could result in PER.

Profitability, capital structure, and financial sustainability are also factors to consider when evaluating the investors. The DER shows the capital structure by showing the ratio of debt to equity, while the CAR shows whether the capital of the bank is adequate to cope with the risk from its operations. A higher DER means that there is higher reliance on outside funding sources, which can pose more financial risks. However, an optimal CAR will be seen as a positive sign for a bank to ensure its financial stability and capability to cope with any possible risks and continue its operations (Perdana, 2022). Thus, the relationship among profitability, capital structure, and capital adequacy plays an important role in creating value in banks.

Taking into account the complexity of banking dynamics, evaluation by investors of companies is not based merely on financial performance accomplishments but also includes GCG practices. The application of governance principlesof transparency, accountability, responsibility, independence, and fairness plays an important role in minimizing potential agency conflicts, enhancing the reliability of financial information, and building investor confidence in the company's sustainability and prospects (Kartika et al., 2022). Banks that effectively implement governance practices generally receive greater market appreciation, as they are considered to have a stronger capacity to sustain performance and create long-term growth prospects.

Previous studies have shown that ROA, ROE, EPS, DER, and CAR influence PER (Ali & Miftahurrohman, 2016; Chandra et al., 2025). However, the results of these studies remain mixed, while research integrating fundamental financial indicators with corporate governance aspects in Indonesia's banking industry remains relatively limited. Given the increasingly competitive industry landscape and rising demands for transparency and governance, understanding the determinants of PER has become increasingly important for investors, management, and regulators.

Based on this phenomenon, this study was conducted to empirically examine the determinants of the PER based on fundamental company indicators is ROA, ROE, EPS, DER, and CAR while also considering the role of governance in Indonesia's banking industry. The findings of this study are expected to enrich the literature in the field of finance, particularly regarding the determinants influencing market valuation of banking companies. Furthermore, the results may serve as a consideration for investors and regulators in understanding the strategic factors that support firm value enhancement and more effective decision-making.

Literature Review

Price Earning Ratio (PER)

PER is a stock valuation indicator that measures the relationship between a stock's market price per share and its EPS, thereby reflecting the degree of investor appreciation for a company's earnings capacity (Brigham & Houston, 2019). PER is an integral part of the process in fundamental analysis because it shows the market perception of a company’s potential earnings growth, its level of profitability, and risks that it can potentially experience in the future. This ratio is used by investors to judge whether the valuation of the stock price is fair or not based on PERs of other similar firms in the industry (Ross et al., 2022).

In addition to acting as an indicator for market valuation, PER also signifies how the financial performance of the business, its strategy execution, and future prospects are perceived by investors. There are certain fundamental drivers that are bound to have an impact on PER, which include profitability, capital structure, liquidity, and growth capabilities (Tandelilin, 2017). The relatively higher PER shows that the investors have a good expectation about the ability of the company to generate future profits, while the lower PER indicates that there is a possibility of risk and less opportunity for growth (Gitman & Zutter, 2018). In this context, the PER can be considered a useful indicator in evaluating investment opportunities.

Good Corporate Governance (GCG)

Corporate Governance Code is an instrument of governance within corporations that is used to direct the relationship and function of shareholders, board of commissioners, board of directors, and others so that the corporate governance process can run smoothly in a transparent, accountable, responsible, independent, and fairness (Rahma & Firmansyah, 2022). In banking, the application of GCG has a strategic position regarding the improvement of the supervisory system, prevention of possible conflicts of interest, and the enhancement of decision-making process. Independent commissioners are one of the elements that should be considered when implementing GCG. This element is important in protecting the interests of stakeholders while increasing the reputation of the company (Mehzabin et al., 2022; Fang et al., 2023).

GCG implementation involves five basic principles that include openness, accountability, responsibility, independence, and fairness that form the cornerstone for developing a proper corporate management system (Illahi et al., 2025). The application of these principles not only serves to demonstrate compliance by the corporation with the regulatory requirements, but also to increase investor confidence and prevent any possible agency problems and thus improve corporate stability and performance. In the case of capital markets, good governance quality is considered a positive signal for investors with respect to credibility, future growth, and sustainability, all of which could result in value of the firm being increased in terms of PER (Rahma & Firmansyah, 2022). This means that GCG is a key factor that helps to build competitive advantage and improve firm value in the banking industry.

Return on Equity (ROE)

Return on Equity (ROE) is a profitability ratio that calculates the company’s capability to earn net profits as a proportion of capital provided by its shareholders. Therefore, ROE indicates how effectively management uses the company’s equity (Sulaiman, 2024). ROE is measured by comparing the net profit after tax and the total equity of shareholders. Financially speaking, ROE can be analyzed using Du Pont Analysis whereby ROE is broken down into three parts: Net Profit Margin (NPM), Total Asset Turnover (TATO), and Equity Multiplier (EM). Through Du Pont Analysis, one will better understand whether increased profitability is due to effectiveness in operations, efficient asset management, or financial leverage (Serwadda, 2018).

ROE is a crucial determinant of a firm’s capability of adding value to the investors and is used by investors to determine their decisions in the process of investing. The larger the ROE ratio, the more efficient the firm is in making profits through the utilization of its equity capital. However, a high ROE should be analyzed alongside solvency ratios such as the DER, since an increase in ROE may also result from greater use of debt (Aprilia & Anjarwati, 2025). A number of studies indicate that ROE has a positive effect on stock prices and firm value, although some studies report differing results, making the relationship between ROE and market performance an issue that warrants further investigation (Karsono & Saharsini, 2024; Aprilia & Anjarwati, 2025; Sulaiman, 2024).

Return on Assets (ROA)

ROA is a profitability indicator used to assess a company's ability to generate net profit through the utilization of all assets it owns. In the banking sector, ROA plays an important role as it reflects management's effectiveness in optimizing productive assets including credit distribution and investment management to generate optimal returns (Kalishara & Manda, 2026). A higher ROA indicates that a bank is increasingly able to efficiently manage its asset resources to generate profit, while also reflecting the quality of asset management and the effectiveness of the company's operational activities. Compared with other profitability indicators, ROA is considered better able to represent operational performance, as its measurement focuses on the ability of assets to generate profit and is relatively unaffected by capital structure decisions or the company's leverage level (Angga & Dermawan, 2023).

Increase in ROA can thus be seen as an indicator which passes on positive signals about how well a bank is able to utilize its resources in order to earn profits and control risks related to operations. This situation would boost investors' confidence about the future of the company, which might help increase the firm value (Kalishara & Manda, 2026). Apart from being an indicator of profitability, ROA is also one of the main indicators used by regulators for assessing the soundness and performance of the banks. The banks which are able to keep their ROA levels consistently high will have a better competitive edge, financial stability, and growth prospects, and therefore, a better market perception which results in the rise of PER (Ariyanti et al., 2018). ROA is therefore an important fundamental factor in explaining the relationship between operational performance and the market valuation of banking companies.

Earnings Per Share (EPS)

EPS is a profitability indicator that reflects the amount of net profit attributable to each outstanding share of common stock, making it an important measure in evaluating a company's performance and prospects through fundamental analysis (Serwadda, 2018). EPS is calculated by comparing net profit after tax adjusted for preferred stock dividends to the weighted average number of common shares outstanding during a given period. This measurement follows applicable accounting standards as set out in PSAK and IAS 33, making EPS important financial information for investors in assessing a company's ability to generate profit for shareholders. In practice, EPS consists of Basic EPS and Diluted EPS, with Diluted EPS accounting for the potential decrease in earnings per share resulting from the conversion of financial instruments into common stock, thereby providing a more conservative picture of a company's earnings-per-share capacity (Karsono & Saharsini, 2024).

For investors, EPS is an important measure in assessing a company's ability to generate profit and in estimating potential future performance growth. Furthermore, EPS is closely related to PER, as it reflects the level of earnings underlying stock valuation assessments. An increase in EPS indicates a company's ability to create greater economic value for shareholders, while also providing a positive indication of management effectiveness and the sustainability of profitability performance. A number of empirical studies have found that EPS has a positive relationship with stock prices and firm value, given that investors tend to assign higher valuations to companies capable of sustaining earnings-per-share growth (Putra et al., 2024; Riyadi & Iqbal, 2024). Therefore, EPS is a representation not just of past financial accomplishments but is also strategic information that helps to shape investor perception about future prospects of a company (Barohin & Nasution, 2023).

Debt-to-Equity Ratio (DER)

The DER is a measure of solvency and is an illustration of how the debt-financing sources of a business can be compared with the business's equity. The DER is a measure that shows the capital structure of a company as well as how reliant a company is on outside financing for its operations (Barohin & Nasution, 2023). DER is determined through the ratio of total liabilities to total equity held by the shareholders. High values of the DER mean a high level of debt in financing a company. Although the use of debt within certain limits can provide benefits through the financial leverage mechanism to increase shareholder returns, an excessive DER level may instead limit a company's ability to manage its financial condition and increase business risk. This is a particular concern in the banking industry, which is characteristically associated with relatively high leverage levels in carrying out its financial intermediation function (Riyadi & Iqbal, 2024).

For both investors and creditors, DER is an important measure in evaluating a company's financial risk level and the quality of its capital structure. A proportional capital structure between debt and equity use is generally viewed as more attractive, as it indicates a company's ability to meet its financial obligations with a controlled level of risk. From a management perspective, capital structure management is directed toward achieving an optimal funding composition between debt and equity in order to enhance funding efficiency and maximize firm value (optimal capital structure) (Aprilia & Anjarwati, 2025). Previous research has revealed that there is an association between DER and value as well as price of stocks; however, empirical results on the nature of influence remain ambiguous. Nonetheless, the DER continues to be a basic factor that contributes to the evaluation of the company's risks by the investors, which is indicated by the PER.

Capital Adequacy Ratio (CAR)

CAR is an indicator that is used to measure the capital adequacy of a bank in the process of forecasting or cushioning itself from the losses that are likely to be incurred from the different types of risks, such as operational risks, credit risks, and market risks, using the capital adequacy of the bank (Rose & Hudgins, 2012). CAR is computed using the ratio of capital of a bank against its Risk Weighted Assets (RWA) (Serwadda, 2018). CAR is crucial in sustaining the solvency of a bank and safeguarding the interests of the customers. The bigger the CAR of the bank compared to the regulatory authority's minimum, the more robust it is to risk absorption (BI, 2018). In addition to being one of the primary indicators in evaluating bank soundness through the CAMEL approach, CAR also serves as important information for investors in assessing the safety, resilience, and quality of a bank's capital structure. Although several studies indicate that CAR does not always have a direct effect on bank profitability (Serwadda, 2018), this ratio remains strategically valuable in strengthening market confidence and reinforcing investor perceptions of the stability and sustainability of banking companies' performance.

Research methods

This study employs a quantitative approach with a descriptive research design aimed at identifying the characteristics and developmental dynamics of fundamental indicators in the banking industry during the research period. A quantitative approach was adopted as it allows for the objective measurement of the research phenomenon through the use of numerical data, statistical analysis, and empirical testing of the relationships among the variables examined (Creswell & Creswell, 2018; Sekaran & Bougie, 2019). The data used are secondary data in the form of panel data: a combination of cross-sectional and time-series data sourced from annual reports, corporate governance reports, financial statements, and official publications of the IDX and OJK. The use of panel data enables a more comprehensive analysis of both variations in company performance across banks and changes in performance over the observation period (Baltagi, 2021).

The population in this study comprises all conventional commercial banks and Islamic commercial banks listed on the Indonesia Stock Exchange (IDX) during the observation period of 2020–2024. Sample determination was carried out using the purposive sampling method, a sample selection technique based on specific considerations and characteristics relevant to the research objectives (Sugiyono, 2022; Sekaran & Bougie, 2019). The sample selection criteria included: (1) banking companies consistently listed on the IDX throughout the study period; (2) the availability of complete annual reports and financial statements during the observation period; and (3) the availability of data required for all research variables. Based on this selection process, 44 banks met the criteria for inclusion as the research sample, yielding a total of 220 firm-year observations.

The data gathering procedure in this study was carried out using the documentation technique that entails identifying, gathering, and analyzing information derived from different secondary sources, including annual reports, financial statement, GCG implementation report, and official publications from the IDX and OJK. Documentation technique is one of the most widely used techniques for conducting financial studies because it ensures that objective data is collected and analyzed through an empirical procedure with validity (Sugiyono, 2022; Sekaran & Bougie, 2019).

The study involves evaluating the following six basic banking performance measures: ROA, ROE, EPS, DER, CAR, and GCG along with PER as a measure of value of the firms. The measurement of ROA, ROE, EPS, DER, CAR, and PER was based on the computation of ratios using the formula in financial ratio analysis and evaluation of corporate performance (Brigham & Ehrhardt, 2023). On the other hand, GCG was measured based on the score given in each governance report of the banks as per the regulations of Financial Services Authority and practices of banking governance in Indonesia.

In the current study, the data analysis was done using a combination of descriptive statistics and trend analysis. Descriptive statistics were used for describing the features of the research data through looking at some statistical measures like the mean, min, max values and year to year variation of variables (Hair et al., 2022). The trend analysis method was then employed to analyze the development trends of basic indicators of the bank, such as profitability, capital structure, capital adequacy, corporate governance, and market value during the period from 2020 to 2024. The use of trend analysis is relevant in order to observe the long-term dynamics of the company’s performance and detect increasing or decreasing trends in a particular financial indicator (Ghozali, 2021; Kasmir, 2019). Results obtained from the analysis will be then presented in tabulated form and visual representations for the purpose of obtaining a more complete view and enabling interpretation of the change pattern for each research variable.

Result

Return on Assets (ROA)

The table below shows how the ROA of the 44 banks grew between the years 2020 to 2024. In general, ROA was seen to grow steadily after facing challenges in the period of the pandemic. While there may be some differences in ROA performance among banks, most banks managed to be more profitable with their assets.

The banks classified as being under the KBMI 4 classification, such as BBCA, BMRI, BBRI, and BBNI, showed better performance through high ROA values compared to that of other banks. However, some of the digital banks and the transforming banks had lower ROA values, and some were faced with profitability challenges to the point of having negative ROA values at the initial part of the study period. However, after implementing new strategies, some of these banks started exhibiting an upward performance trend.

Return on Equity (ROE)

Development of ROE is shown in Table 2. In general, ROE started improving after 2020, which was facilitated by increased profitability of banks for the benefit of their stockholders. At the same time, significant disparity between ROE of various banks remained due to different capital structures, size of business, and business strategies of individual banks.

Big banks showed rather stable ROE values during the whole research period. In turn, ROE of several digital banks demonstrated substantial fluctuations because these banks still were in the stage of capital accumulation and business model formation. The ROE dynamics demonstrate the improved profitability of the banking sector in connection with its transition to the economic recovery period.

Earning per Share (EPS)

Table 3 represents the development of EPS. The findings demonstrate that the majority of banks saw growth in EPS between 2020 and 2024 but that several banks showed negative EPS owing to net losses in the initial stages of their business change.

The rise in EPS was especially pronounced among those banks that had been exhibiting stable profits and earnings growth. However, banks that were yet at the stage of expansion and technology investment had more variable EPS. From the perspective of the evolution of EPS, it is apparent that banks' capability of generating earnings per share has improved.

Debt-to-Equity Ratio (DER)

Results from the DER analysis show disparities in the nature of the characteristics of funding structures among banks. Large banks show higher DER as a result of large collections from third parties. Some digital banks, on the other hand, show lower levels of DER through strengthening of their capital.

Capital Adequacy Ratio (CAR)

CAR development is shown in Table 5. Generally speaking, all the banks kept their CAR ratios above the regulatory minimum. However, there was one exception - there were some extreme values for those banks that increased their capitals via rights issue.

Generally, this means that the Indonesian banking industry kept the capitalization rate sufficient enough to facilitate business growth and maintain stability of the financial system during the time span of this research.

Price Earning Ratio (PER)

The firm value was determined based on PER. It is clear that there were quite a few differences in terms of market value between different banks. Major banks showed quite stable PER while a number of digital banks had quite high PER in the beginning stage of their transformation due to high expectations for growth from investors. Also, there were cases when PER was not present due to negative EPS.

PER overall shows the improvement in the market valuation of banks that was consistent with the improvement in profitability and fundamental performance in the post-pandemic era.

Good Corporate Governance (GCG)

The GCG implementation was assessed based on the composite self-assessment rating of the bank. The outcome shows that there has been an improvement in the governance quality over the period of 2020 to 2024 as the average rating for GCG composite has fallen from 2.2 in 2020 to 1.8 in 2024.

Majority of banks that were included in the sample in the research were rated as Very Good and Good respectively, especially in banks which had bigger capability of business and organizational structure. At the same time, there are some banks whose ratings have been improved within the observation period due to better implementation of the principles of GCG: transparency, accountability, responsibility, independence, and fairness. Therefore, it is possible to say that the quality of the implementation of governance practices in the Indonesian banking industry has become better over the time.

Discussion

Discussion

Determinants of Profitability and Banking Firm Value

It is evident from the results that profitability measures such as ROA, ROE, and EPS have been improving over the 2020-2024 period. Improvement in profitability performance is because of the capability of the Indonesian banking sector to rebound from the stress created due to the COVID-19 pandemic. Improvement in profitability has been mainly attributed to improved intermediation operations, asset quality management, and operational efficiency.

This is in line with what is referred to as the signaling theory by Spence (1973) in which an improvement in financial performance acts as a positive signal sent out by the organization to its investors in respect to future growth and sustainability of the firm. In the banking industry, the improvement in ROA and ROE does not only show how profitable the bank is but how well the management of the bank optimizes the use of productive resources. This conclusion is in keeping with the idea that financial performance may lead to an enhanced perception by investors concerning the management of the company and build confidence in the long-term outlook for the firm. This is in line with the idea of Brigham & Ehrhardt (2023), who observe that profitability metrics are some of the main tools used by investors to measure a company’s growth potential and value.

However, it is evident from the results that the relationship between profitability and PER is not necessarily linear, because some of the digital banks recorded high PER values despite low levels of profitability. This means that the decision-making process of investors is not necessarily based on a firm’s historical performance but is also affected by its future earning potentials and expectations. According to Damodaran (2012), valuation metrics of the market like PER are the result of the firm’s present performance and expectations about the growth of future cash flows.

In this regard, the results from this study indicate that profitability is an important element which contributes to how the market evaluates the firm. Nevertheless, the effects of profitability on firm valuation do not occur in isolation as there are a number of other elements that contribute to the same including the anticipated growth of the firm, nature of the business model and the firm’s future performance strategy.

The Role of Earnings per Share (EPS) in Market Value Formation

EPS can be defined as an indicator that shows the financial performance of a business through profits per share owned by the shareholders. From the findings, it can be concluded that banking firms that enjoy more stable EPS growth are usually valued more consistently than those with volatile EPS growth in terms of their PER.

This finding is in line with the principle of fundamental valuation, where investors tend to give more positive valuations to those businesses that can earn profits in a continuous manner over time. As mentioned by Brigham and Ehrhardt (2023), an increase in EPS indicates that the business has been successful in creating more economic value for its investors.

However, it is important to note that the outcomes reveal some financial institutions which could not produce a PER figure owing to negative EPS throughout the duration of the study. This is attributed to the fact that, from a procedural perspective, the PER ratio can only make sense when a firm registers positive earnings. In case of negative profits, the PER ratio becomes irrelevant (Damodaran, 2012).

This trend can be seen clearly among a number of banks going through the process of digital transformation. Losses at the initial stage of this transformation do not mean a fundamental problem; rather, they could just be the costs incurred to make technological and infrastructural changes.

Capital Structure, Risk, and Investor Confidence

The results indicate that DER and CAR levels vary in characteristics across bank groups. Large-scale banks generally exhibit higher DER, as they carry out financial intermediation activities by managing substantial third-party funds as their primary funding source. Meanwhile, several digital banks show relatively lower DER, having strengthened their capital structure through corporate actions such as capital injections from investors or the issuance of other funding instruments.

In the context of the banking industry, the interpretation of DER differs from that applied to companies in non-financial sectors, given that most bank liabilities originate from third-party fund collection as part of their intermediation function. Accordingly, a high DER does not necessarily reflect greater risk, provided that the bank is able to maintain asset quality, manage risk effectively, and meet applicable capital adequacy requirements. CAR, on the other hand, reflects a bank's ability to provide sufficient capital to anticipate potential losses arising from various operational and business risks. It can be seen from the findings that each bank had CAR that exceeded the minimum threshold set by the regulator, implying that the Indonesian banking industry has strong capital strength and is financially resilient.

This is consistent with the approach adopted by the Basel Committee on Banking Supervision (BCBS, 2019), which argues that capital adequacy is a basic factor in improving the resiliency of the financial system. High levels of capital show that the bank has more ability to absorb any potential losses associated with credit risk, market risk, and operational risks, thus creating more trust among investors concerning the financial position of the bank. The presence of a high CAR is a signal for the market since it indicates that a bank can sustain stability and continuity in its operations. As such, capital adequacy is not only seen as an adherence to regulatory demands but also as a part of a strategy aimed at gaining investor confidence.

Good Corporate Governance (GCG) as a Supporting Factor for Firm Value

From the results of the analysis, it is clear that the practices of GCG within Indonesia’s banking industry have been positive between the years 2020-2024. This is evident from the improvement in the average GCG composite score, which fell from 2.2 to 1.8, showing improved practices of corporate governance within the organization. The improvement implies that the banking industry has increasingly improved its control systems, information sharing, risk management, and accountability in carrying out their operations. This is supported by agency theory (Jensen & Meckling, 1976), where it is believed that good corporate governance is very vital in reducing the conflict of interests that exists between management and the stockholders through improved supervision.

In the field of banking, the application of GCG is now assuming a very important role due to the sustainability of operations being heavily reliant on the degree of trust that the public and investor community have towards the bank. Financial reporting, oversight of the board of commissioners, independence of the audit committee, and proper risk management implementation are some examples of factors which maintain the reputation of the bank and ensure its continued operations. The results demonstrate that banks with high governance quality will be characterized by strong and more consistent financial fundamentals. The conclusion confirms existing research on how good governance implementation helps increase investors’ confidence by decreasing information asymmetry (OECD, 2023).

Integration of Fundamental Factors in Determining PER in Indonesian Banking

Overall, the results of the current research show that the PER of the Indonesian banking industry is not based on one single factor, but rather depends on the interrelation of many different underlying factors, such as earning power, capitalization structure, capital adequacy, and corporate governance quality. The banks that are profitable, have a higher EPS, high CAR, and better GCG practice usually have a higher capacity to preserve their market value. However, at the same time, the findings also suggest that perceptions about banking firms within capital markets are not consistent, but rather vary because of different characteristics and situations faced by various banks. Traditional large banks usually receive more stable valuations on the basis of their proven performance history, while digital banks are characterized by dynamic valuations on account of growth-expectation discrepancies.

These results support the concept that market valuation is the result of both the current performance of a firm and the expectations of investors with respect to the future performance of the company. In order to increase the value of banks, therefore, both profitability and good governance must be achieved. Overall, the results of this study indicate that PER formation in Indonesia's banking industry during the 2020–2024 period was determined not only by companies' earnings capacity, but also by the balance between profitability as a value-creating factor, CAR as an indicator of risk resilience, and GCG as a strategic mechanism for maintaining corporate stability and sustainability.

Conclusion

1. Profitability Performance (ROA, ROE, EPS): This study finds a positive developmental trend throughout the observation period. The increase in ROA and ROE indicates an increasingly effective ability of banks to manage available assets and capital to generate profit, while EPS growth reflects an enhanced capacity of companies to create economic value for shareholders. Nevertheless, profitability levels across banks still exhibit considerable differences, particularly between large-scale banks which already benefit from economies of scale and stronger fundamentals and digital banks or banks still undergoing business transformation, which continue to face challenges related to initial investment requirements and business model development.

2. Capital Structure and Risk (DER, CAR): The results indicate that Indonesia's banking industry is in relatively sound condition. CAR levels across all banks exceeded the regulator's minimum requirement, indicating that banks possess adequate capacity to absorb risk and maintain operational stability. Meanwhile, DER in the banking industry should be understood within the context of the sector's business characteristics, as high liabilities largely stem from public fund-collection activities and do not necessarily reflect increased financial risk.

3. Governance Implementation (GCG): There was a positive trend in the GCG implementation during the observation period. The better average rating of GCG composite from 2.2 in 2020 to 1.8 in 2024 denotes better effectiveness of corporate governance implementation, especially in terms of transparency, accountability, independence, responsibility, and equity. This improved governance quality is a key factor that can be used as a strategic tool for building investor confidence, corporate credibility, and sustainable banking performance.

4. Market Value (PER): It is not necessary that the connection between the profitability level and value of the firm will be in a linear fashion. The banks which earn high profits normally get regular appreciation in the market, but there are some banks which have limited profits but still show a high PER because of their potential growth in the future, which gives them hope to their investors for the growth in the future. This shows that investment decisions not only depend on past performances of the firms.

Recommendations

1. For Bank Management

Banking firms must ensure that they keep improving their underlying quality through enhanced profitability by optimizing their operational efficiency, quality of productive assets and intermediation models. The banking firms should not just focus on their profit maximization but should rather adopt models for sustained profit generation.

Furthermore, in banks undertaking the digital transformation process, it is imperative that they undertake their growth process more judiciously. A lot of investment in technology and the building of the digital ecosystem might have adverse effects on the bank’s bottom line.

1. For Investors and Prospective Investors

It is recommended that investors do not solely depend on one indicator when valuing a financial institution. PER indicator needs to be thoroughly evaluated in relation to other indicators including ROA, ROE, EPS, CAR, and GCG quality. High PER values do not necessarily mean overvaluation of the company because it may mean that the company has high growth prospects, while low PER values are not necessarily indicative of a good investment opportunity.

Investors should also consider the specific characteristics of individual banks, particularly the differences between large conventional banks and digital banks, which exhibit distinct growth patterns and risk levels.

1. For Regulators (OJK and Bank Indonesia)

It is important for the regulators to continue improving the regulatory policies regarding supervision in relation to the banking sector, especially as far as capital adequacy, governance quality, and risk management are concerned. The emergence of digital banks should get special focus, since innovations in the technology arena should go hand in hand with prudential practices in banking.

Moreover, transparency and corporate information disclosure standards should continue getting improvement, in order for the investors to have access to reliable information about their investment decisions.