Indonesia's banking industry has grown fast in assets, credits and profits, in the past two years. The growth was partly attributable to a 6% growth of the real sector that contributed to credit expansion.
The monetary policy adopted by Bank Indonesia maintaining a competitive benchmark interest rate (BI rate) through out 2010 that has attracted large short term funds from abroad . The inflows of foreign capital have been strong lately that forced Bank Indonesia to be more prudent in dealing with the inflows of short term funds. The central bank has stopped issuing one-month and three-month SBI in favor of SBI having term longer than 6 months. The central bank encourages the short term foreign funds to be invested in other securities such as 1-year State Securities (SBN) in a bid to keep them longer in the country and prevent. The government even hopes to gain from the strong inflows of short term funds by attracting them to direct investment.
The central bank still maintains a liberal policy despite the abolition of short term Bank Indonesia bills (SBI).
Bank Indonesia encourages credit expansion by requiring banks to provide larger minimum reserve requirement (GWM) if their loan to deposit ratio (LDR) is less than 78% or more than 100%.
The contribution of consumer credits is growing to total bank credits in the past two years. Meanwhile, working capital credits and investment credits have fluctuated. Working capital credits fell in 2009 before growing again in 2010 and on the contrary investment credits grew in 2009 but fell in 2010.
In 2011, the banking sector is expected to continue to record a healthy growth. Banks are expected to earn big profit from handsome fee-based income and high interest income.
Local and foreign investors, therefore, would still seek in invest their funds in the banking sector in Indonesia. Their interest could be implemented through acquisition of existing banks or increasing stake in local banks.
In the period of 2008- 2010, the waves of acquisition continued involving domestic and foreign banks. HSBC and Barclay Capital PLC respectively acquiring Bank Ekonomi and Bank Akita. Big banks are especially growing interested in expanding their base in consumer credit market.
Throughout 2009, the monetary authorities maintained the relaxation policy by cutting the BI rate. The BI rate was cut by phases since February 2009 down 175 basis points to its lowest ever at 6.5% in August 2009. The level was maintained until early 2011 although it was still relatively high compared to central bank interest rates in the United States, Europe, and Japan even in some of the neighboring countries.
The disparity in interest rates has prompted the inflows of short term funds from those countries especially depressed economies. With the unfavorable condition in some of the countries including the United States and Europe, the funds are not expected to leave the country in short term.
The interest rates in Indonesia are relatively high benefiting the banking sector.
Bank Indonesia encourages credit expansion
The country's central bank strongly encourages commercial banks to play their banking role of providing credits for productive sector. Local banks have been criticized as seeking interest income only from non productive instrument like SBI.
The central bank has ruled that banks failing to meet the required level of LDR are required to have larger minimum reserve requirement (GWM). In October 2010, the central bank announced the regulation that banks are required to have an LDR of 78% -100% or they have to have a larger GWM. Those banks. Failing to meet the LDR range will be punished with disincentives as follows:
" Banks having LDR less than 78% are required to have additional GWM of 0.1% of their third party funds for every LDR deficit of 1 percentage point.
Banks having LDR higher than 100% and CAR less than 14% are required to have additional GWM of 0.2% of their third party fund for every LDR excess of 1 percentage point.
" Banks having LDR higher than 100% with CRA higher than 14% are not required to have additional GWM.
Another quite strategic policy is the extension of the SBI term. Starting June 2010, Bank Indonesia (BI) held auction of SBI every month. Earlier auction was held every week and the instruments used to withdraw public fund and reduce excess liquidity were 3-month and 6-month SBI sold to investors.
In November 2010, the central bank stopped selling 3-momnth SBI by focusing only on 6-month and 9-month SBI to withdraw public funds. The abolition of shorter term SBI was an attempt to keep foreign funds longer in the country and protect banks from being affected by the movements of he short term funds.
Hot money began to flow strongly into the country in 2010. While it helps strengthen the local currency and increase liquidity, the short term funds could potentially disrupt stability in the event of sudden reversal of the flows. Much of the hot money was invested in SBI. By the end of the first quarter of 2010, the amount of foreign funds invested in SBI surged from Rp 27.62 trillion to Rp 71.8 trillion on April 9, 2010 or a four fold increase from Rp 15.27 trillion a year earlier. It was the highest amount of foreign funds ever invested in SBI.
By April 2010, foreign funds made up 22.5% of the total amount of Rp 316.1 trillion of funds invested in SBI. Meanwhile, foreign fund invested in state bonds were worth Rp 107.9 trillion or 23%.
After the abolition of the 3-month SBI , sales of 9-month SBI were worth Rp 30 trillion, 6-month SBI at Rp 25 trillion and sales of sharia SBI Rp 636 billion in the auction held on Dec. 8,
Total sales of SBI were Rp 55.64 trillion with demand reaching Rp 86.23 trillion including Rp 50.51 trillion for 6-month SBI and Rp35.11 trillion for 9-month SBI and Rp 636 billion for 6-month sharia SBI.
Banks expand with more branches
Banks began to launch expansion by opening new branch offices in 2008. The trends continue through 2009 and 2020 with a total addition of 800 new bank branch offices.
PT Bank Pan Indonesia (Panin) Tbk. has announced it planned to open more bank branch offices. The bank set aside Rp300 billion-Rp400 billion to open 130 new branch offices. Currently Panin Bank has 420 units of branch office to be increased to 550 units next year.
The new branch offices are aimed at expanding credit market to micro business area, which has attracted major banks including foreign banks. The sector is seen to be safer and more profitable.
Currently Panin bank is opening outlets to serve customers or borrowers among micro businesses in 12 branch offices in Surabaya. The enthusiastic response from the customers to the opening of the outlets encourages the bank to open more outlets in other areas such as Sulawesi, Bali, Central Java and Riau.
Micro financing promised a good business. The bank has so far provided only Rp500 billion or 2% of its credits for the micro business sector. It hopes to increase the percentage to at least 5%.
The assets of banks in Indonesia have continued to increase up 9.1% annually on the average in the period of 2005 - 2010. In 2009, the assets of commercial banks reached Rp 2.534 trillion or an increase of 10% from the previous year. The growth rate was higher than 6.3% in 2008. A higher growth of 13% was recorded in 2010 with assets reaching Rp 2,856 trillion.
Most of the assets are owned by a few large banks. In November 2010, around 65% or Rp1, 849 trillion of the assets belonged to 12 banks. The country has around 122 banks in 2011.
The largest in assets is state lender Bank Mandiri with assets reaching Rp374 trillion by July 2010, followed by Bank Central Asia (BCA) with assets worth Rp309 trillion, state lender Bank Rakyat Indonesia (BRI) with assets of Rp308 trillion .
CIMB Niaga joined the big five with assets of Rp133 trillion. In 2008, CIMB Niaga was still the 7th largest below Bank Danamon and Panin Bank.
Bank Permata also rose to a higher position relegating Bank Internasional Indonesia (BII) from the 8th position with assets worth 70.4 trillion.
Banking capital stronger
Bank capital has increased by 19% in the past two years to reach Rp314 trillion by November 2010. The high growth followed health performance marked with high profit. In the third quarter of 2010, 10 largest banks in assets reported a 41% increase in net profit combined. Big profit allowed them to retain part of the profit for capital.
Some banks plan rights issue or issuing bonds to raise fund to strengthen capital. Bank Mandiri plans to issue 2.34 billion new shares hoping to raise Rp9.3 trillion to Rp l4.4 trillion. The new shares would be listed on the Indonesian Stock Exchange (DSX).
Bank Negara Indonesia (BNI), the country's fourth-largest bank by assets, planned to launch a rights issue in early December 2010, releasing 3.37 billion new shares, or around 13% of its total equity. The plan, however, had apparently been delayed until time yet to be announced.
State-owned Bahana Securities, which has been mandated as the standby buyer for the shares offer, said the fixed price for the rights issue would be announced after a book building period which will conclude at the end of November.
Goldman Sachs, UBS Securities, Morgan Stanley Securities, Macquarie Securities and Credit Suisse Securities were already appointed as selling agents for the rights offer.
The government has decided not to use its rights to buy new shares. Therefore, the government's share in BNI will be reduced to around 60%. This would bring the publicly owned stake in the bank to around 40% after the rights issue.
According to the banks official statement regarding the offer, BNI planned to use most of the proceeds from the rights issue (around 80%), to fund loans to corporations, consumers and small and medium enterprises.
The bank posted a 59.3% increase in net profit in the January-September period, to Rp 2.95 trillion from the previous Rp 1.86 trillion. The jump was mainly the result of higher net interest and sharia income at Rp 9 trillion up to September of this year, which was up 8.4% from last year's Rp 8.31 trillion.
Bank Mandiri the largest in capital
A number of banks having large capital dominated the banking market in Indonesia. Around 11 of around 122 banks account for 60% of the total bank capitals.
Bank Mandiri leads in term of capital. By November 2010, the state lender had capital worth Rp43.6 trillion, followed by BCA with capital of Rp33.2 Trillion as the second largest, and BRI with capital of Rp31.5 trillion by July 2010. By the end of 2010, however, BRI moved up to second place relegating BCA to third place.
The fourth largest was BNI with capital worth Rp19.8 trillion.
Capital adequacy ratio (CAR)
Indonesian banks recorded high capital adequacy ratio (CAR) of 17% on the average in 2010 radiating a healthy growth, Bank Indonesia said. Banks have performed their intermediary role well as indicated by the strong growth of 22.8% in credits, the central bank said in a monetary policy review report.
Based on the report, the country's banks aggregated Rp 3,009 trillion (US$ 334.3 billion) in assets in 2010 up from Rp 2,534 trillion in the previous year.
Third party funds held by around 130 banks in the country rose 18.5% to Rp 2,339 trillion with outstanding credits of Rp 1,796 trillion up from Rp 1,461 trillion.
The country's banks were in strong position to meet risks with high CARs, and gross non performing loans of only 2.9% and loan to deposit ratio of 76.8%, the central bank said.
By November 2010 the CARs of Indonesian banks reached 18.3% on the average higher than 17.4% in 2009. The ratio was quite safe.
The CAR of a number of large banks in 2010 was lower than in 2008. The CAR of Bank Mandiri was 13.5%, down from 17% in 2008
BII also recorded a decline in CAR from 18% to 13.2%. On the contrary some banks posted an increase in CAR such as BTN, Permata, and Citibank. BTN's CRA rose from 16% to 17.2%, that of Permata from 11% to 12.8% and that of Citibank from 22% to 25.6%. ...............