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High costs of funds dragging profitability of mid-size Indonesian banks

Publication Date : 31-05-2014

 

The surging costs of funds in Indonesia, as a result of increased competition, have started affecting the profitability of the country’s mid-size banks, according to the latest report issued by the Financial Services Authority (OJK).

The OJK said the increase in the cost of funds, mainly due to high interest rates on deposit and savings, had dragged the return on assets (ROA) of banks, which fall in the BUKU III category — banks whose core capital ranges from 5 trillion rupiah (US$429.83 million) to 30 trillion rupiah.

Based on its weekly survey issued on May 21, banks under the BUKU III category posted ROA of 1.93 percent, lower than the average 3.01 per cent booked by the banking industry.

“We noticed that the spread margin reported by BUKU III lenders was relatively tight, mainly because they charged lower lending rates compared to other banks,” said OJK deputy commissioner for banking supervision Endang Kussulanjari Tri Subari, during a media briefing on Friday.

On the other hand, she added, banks under the BUKU III category mostly offered higher deposit rates due to an increase in competition to attract third party funds.

“The situation then worsened because the credit guideline set by BI [Bank Indonesia] and the OJK had limited lending expansion, especially in the first quarter [Q1]. So in the end, their costs of funds surged and their profitability was affected,” Endang said.

ROA is used to measure banks’ profitability, which is generated by their assets. The OJK report shows that the ratios stood at 2.44 per cent for BUKU I lenders, 3.01 percent for BUKU II lenders and 3.89 per cent for BUKU IV lenders.

There are currently 53 banks in the BUKU I category, with core capital less than 1 trillion rupiah; 45 banks in BUKU II, with capital of 1 trillion to 5 trillion rupiah; 17 banks in BUKU III, and four banks in BUKU IV, with capital of more than 30 trillion rupiah.

The BUKU IV category covers major banks Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Central Asia (BCA) and Bank Negara Indonesia (BNI).

As previously reported, BI jacked up its benchmark interest rate by a total of 175 basis points to 7.5 per cent in June to November 2013 in an effort to cope with macroeconomic volatility. Domestic lenders then followed suit by raising their interest rates to secure liquidity.

Permata Bank is among the BUKU III lenders that saw its ROA decline. In the first quarter of 2014, its ROA was 1.17 per cent, down from 1.36 per cent a year ago.

Permata interim president director Roy Arman Arfandy acknowledged the hardship, saying that customers still preferred to keep their money in BUKU IV lenders as they were the largest banks.

Atma Jaya University economist Agustinus Prasetiantoko echoed Roy’s sentiment, saying that for the most part, BUKU III lenders were in a difficult position right now. “They have less loyal depositors and they have less competitive fee-based income compared to large banks.”

However, despite contraction in the BUKU III category, the OJK estimates that the industry’s ROA will hover around 3 percent this year, similar to the 3.08 per cent reported in 2013.

 

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