2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
July 2011

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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.




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