Abstract This study examines the dynamic relationships between banking prudential indicators, profitability, and macroeconomic variables in Indonesia using monthly data from 2010 to 2024. Given the presence of mixed integration orders identified through unit root tests, the analysis employs a combined Vector Error Correction Model (VECM) and Autoregressive Distributed Lag (ARDL) framework to capture both long-run equilibrium relationships and short-run dynamics. The findings indicate that internal banking factors play a more dominant role than macroeconomic variables in determining bank profitability. In particular, credit risk, measured by the non-performing loan (NPL) ratio, emerges as the most influential determinant, exerting a significant negative impact on profitability in the short run and remaining central in long-run dynamics. Liquidity and operational efficiency also affect profitability through time-varying mechanisms, reflecting a trade-off between risk and return. In contrast, capital adequacy and macroeconomic variables, including the policy interest rate and inflation, show limited short-run effects. The cointegration results should be interpreted with caution due to differences between the Trace and Max-Eigenvalue statistics; however, the consistency of ARDL results supports the robustness of the findings. Overall, the results highlight the critical importance of credit risk management and internal efficiency in sustaining banking performance.
Sofyan et al. (2026) studied this question.