INDONESIA'S BANKING RESILIENCE AGAINST FINANCIAL CRISIS
Global financial crisis that struck in 2008 is not yet over. Threat of new wave of crisis is even looming large haunting countries in the euro zone including Greece, Ireland, Italy and Portugal. Any country may comes next joining the list of ailing countries in that region. .
The impact of the protracted crisis is not unlikely to spread to other regions including East Asia, which has so far enjoyed a fairly healthy growth.
As always has been crisis spreads faster through the financial sector. Countries having weak banking system or bigger banking exposure to crisis hit countries would likely be the first to suffer the impact.
Indonesian banking industry has little exposure to debt burdened countries in the euro zone and the United States. Therefore, the impact of the crisis is not so serious at least until today. However, if the crisis continues the impact could be bad for the country's banking sector.
Liquidity crisis could come as a new problem if the head offices of foreign bank branches in the country are facing cash flow problem such over default on bonds issued by crisis hit states. The head offices may have to withdraw their funds from their branches abroad such as Indonesia. The crisis will spread the wider when big corporations are facing financial difficulties and have to withdraw funds from their units all over the world triggering liquidity problem in many countries . Indonesian banking sector, therefore, could also be indirectly hit by the crisis in Europe and the United States.
Indirect impact of the crisis could also hit the real sector because of shrinking exports on weak demand in international markets. As a result inflows of foreign exchange to banks would decline.
Bank resilience is still high
After lingering crisis for over three years, Indonesian banking sector has been able to weather and avert financial crisis. The strength of the country's banking sector is reflected in a number of indicators such as credit expansion, liquidity, capital adequacy ratio (CAR) and provision against non performing loans - all are in good levels. Credits continue to grow amid the global crisis. Ambitious credit expansion without sufficient liquidity, capital and reserves would be liable to run into big problem.
Credit expansion has been high in the country in the past five years excepting in 2009 . Bank credits grew 20% a year on the average . In 2009, growth is still recorded though slower at 10% and in 2010, the growth was high again at 23%.
Liquidity is still safe despite the credit expansion. Since 2008, the loan to deposit ratio (LDR) has been above 70% . In the past two years LDR averaged 79.67% which means the liquidity is still good with more room for credit expansion.
The bank CARs are by far in a better level compared with the average when the country was beset by monetary crisis in 1998. In the wake of the 1998 crisis, when many banks collapsed or were driven to the brink of bankruptcy. The CARs of commercial banks in the country in the past five years have averaged more than 12% in line with the Basel III requirement. By June 2011 , the CARs of Indonesian banks averaged 17%.
The fundamental strength of the country's banks is reflected by the levels of their non performing loan (NPL), which are relatively low despite the high credit growth. . In 2006, the gross NPL of banks averaged 6.07% and in June 2011, it was only 2.74%.
The level of 2.74% is relatively safe but there is still potential risk The NPL could easily surge if the oil fuel (BBM) prices and interest rates are raised . There is potential default in consumer and small business credits amid shrinking exports of commodities .
The performance of the country's banks has also improved based on their record of Return on Assets (ROA), which grew from 2.33% in 2008 to 3.07% in June 2011 . Their Net Interest Margin (NIM) is high at 5.79% despite declining lending rates..
With high profitability ratio (NIM and ROA) , the country's banks would have enough reserves to be set aside for provision against NPLs .
The performances of banks could also be seen from the profit they earn. In the past three years banks recorded a sharp increase rising from a total of Rp 30,606 billion in 2008 to Rp 57,309 billion in 2010. In the first half of the year the total profit already reached Rp 37,096 billion. With the good financial performances, the shares of Indonesian banks are the beset sellers in the world.
Performance of largest banks good
The good performance of the banking sector in Indonesia is attributable mainly to healthy performances of big lenders. The country's largest lender in assets Bank Mandiri has maintained good performance. While posting high credit growth, Bank Mandiri could still keep a safe level of CAR at 16.65% , well above the minimum level set by the central bank with LDR at 73% allowing more room for credit expansion.
Large banks in the country recorded good ratio of reserves against gross NPL more than 100%. BCA, Mandiri. BRI. BNI. CIMB Niaga. Danamon. BTPN. OCBC NISP all have provision coverage ratio of more than 100% They have LDR below 100% allowing more room for credit expansion. Bank Tabungan Negara (BTN), a medium sized bank, however, already had LDR at 110 %.
In addition large banks still have access to bond market to improve heir liquidity. Banks, however, need to be always aware that liquidity of bond market tends to fluctuate depending much on the confidence of foreign investors which have a 35% share of the market of state bonds.
The debt problem in the euro zone has no effect the Indonesian banks. The banks have continued to record good performance amid the global economic slowdown and financial woes. Meanwhile, foreign banks began to experience sluggish performance. Citibank, previously ranked among 10 largest lenders in the country has been thrown out of the top ten banks after recording a sharp fall in profit as a result of the sanction by the central bank over case of embezzlement of funds belonging to depositors by one of its officials and the death of a debtor in the hands of its debt collectors.
The threat is still potential for the crisis in the euro zone to spread to other regions. Therefore, Indonesian banks need to continue to observe banking prudential principles. In fact small banks begin to face liquidity problem. Only two big lenders Bank Mandiri and Bank Central Asia (BCA) still have excess liquidity. If foreign exchange supplies begin to fall short of requirement even big banks could also be in difficulty to maintain their liquidity.