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Indonesian banks brace for challenging 2014

Publication Date : 06-01-2014


Having survived a stormy business period in 2013, Indonesian lenders are facing another challenge as the economy of 2014 will remain tight.

Most lenders, including major banks, have said business in 2014 will be slower than in previous years. This view is based on various estimates, including from the government and Bank Indonesia (BI), which say the economy will not fully recover in the coming year, but will show signs of improvement.

While the government has set the growth rate at 6 per cent, the central bank has predicted the economy will surge to between 5.8 per cent and 6.2 per cent.

In his 2013 year-end remarks, BI Governor Agus Martowardojo said the growth target and the current benchmark interest rate, which rose by 175 basis points to 7.5 per cent since June, would lead to credit expansion of around 15 to 17 per cent in 2014, falling from a previous range of 19 to 20 per cent.

On the other hand, BI predicts third-party funds (DPK) in the banking industry to rise to between 15.4 and 16.4 per cent, up from 14.8 and 15.8 per cent.

Recent research by the global rating agency Fitch Ratings suggests that asset quality and profitability pressures are on the rise for Indonesia’s banking sector, triggered by domestic interest-rate hikes, a weakening rupiah and a slower domestic economy.

It also expects the average non-performing loans (NPL) ratio to start rising to between 3 and 4 per cent in 2014, as a result of risks stemming from higher interest rates and the adverse effects of commodity prices.

However, despite the challenges, Fitch estimates that the banks will still maintain higher profitability compared to their peers in Asia.

Similar to Fitch, Moody’s Investors Service says “banks in Indonesia are at risk of rising adjustment pressures after a period of strong credit growth, but still have stable outlooks due to banks’ loss of absorbing buffers”.

Separately, Gadjah Mada University (UGM) economist A. Tony Prasetiantono said the central bank seemed perplexed when it set the 2014 economic and credit growth estimates.

“If we want to achieve economic growth of between 5.8 and 6.2 per cent, loans must at least grow at a rate of 20 per cent. On the contrary, by setting a loan target at 15 to 17 per cent, we will only see 5.5 per cent economic growth,” he said.

According to Tony, these conflicting targets, the current account deficit and the weakening rupiah will then result in 2014 becoming a “cloudy” year for Indonesian banks.

Bankers have acknowledged they will have to strive amid tougher liquidity competition, bear higher costs of funds and suffer a lower net profit margin this year.

According to Achmad Baiquni, the finance director of state-owned Bank Rakyat Indonesia (BRI), which has posted the biggest profits among all lenders for the past seven years, it is prepared to see its net profits squeezed as a consequence.

“We predict our bottom line will only grow at a pace of 10 to 12 per cent this year, lower than the previous pace of 17 to 22 per cent,” he said recently.

BRI began to feel the pinch in its bottom line last year, when its net interest margin (NIM) fell to 8.2 per cent during the first nine months of 2013 from its 8.4 per cent recorded in the same period in 2012.

To get by in 2014, BRI plans to boost its fee-based income by expanding its electronic banking business.

Pahala N. Mansury, Bank Mandiri finance and strategy director, said the lender would be on the lookout for an even tighter liquidity situation in the first quarter, especially with the US Federal Reserve’s plan to scale down its stimulus package.

“That will give more certainty to our liquidity situation. We hope banks will not become more aggressive in promoting higher interest because that will affect our soundness,” he said.

Bank Central Asia (BCA) — the largest private lender — is ready to lower its loan targets in 2014 to an average of 13 to 15 per cent, down from the previous 23 per cent.

“Almost all of our loan segments will be affected by lower business, such as retail, small- and medium-scale enterprises and corporate,” said Jahja Setiaatmadja, BCA president director.


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