Banking industry battered inside out in 2015

Jakarta, 31 Desember 2015

Banking industry battered  inside out in 2015

The banking industry has experienced the downside effects of numerous challenges in the global and domestic economy this year after enjoying significant growth in previous years.

Domestic banks, which enjoyed more than 20 percent loan growth for years, were forced to lower their targets in 2015 as their credits only grew around 10 to 11 percent; and even single digits for several months.

Analysts and bankers have said that the sluggish credit growth was mainly triggered by the country’s weak economy, which grew 4.72 percent year-on-year (yoy) in the first quarter of this year, the slowest since 2009.

GDP growth continued its low trend as it stood at 4.67 percent in the second quarter and 4.73 percent for the July to September period as domestic consumption, the country’s largest engine of the economy, grew weak.

The slow GDP growth was coupled by lingering effects of global commodity prices drops as well as currency volatility due to the US’ Federal Reserve’s plan to hike its fund rate.

“The rupiah was trading at its weakest level against the US dollar since 1997 and 1998. Investors are concerned about the potential for capital outflow,” DBS Group Research said in its July report.

A report on Asia-Pacific banks published by Moody’s rating agency in December said that the environment for Indonesian lenders was under pressure due to the weaker rupiah against the dollar as well as substantial increases in interest rates in 2013 and 2014.

The worsening impacts have also started to take its toll as domestic banks saw rising risk of bad loans in the domestic banking industry for nearly a year, forcing them to raise their loan-loss provisions that surged expenses and pressed down profits.

Irwan Lubis, deputy commissioner for banking supervision at the Financial Services Authority (OJK), said weak demand nationwide had affected companies’ cash flow, leaving them unable to repay their loans to lenders.

OJK data said that gross non-performing loan (NPL) in domestic banks stood at 2.7 percent as of September, slightly lower than the 2.8 percent recorded in August after rising from 2.2 percent at the end of last year, with gradual increases to 2.46 percent, 2.56 percent and 2.7 percent in May, June and July, respectively.

As for individual banks, Irwan said some of them posted gross NPL of above 5 percent, while pointing out that “their loan-loss provisions are adequate, so that their capital adequacy ratio [CAR] are not affected and only impacted their profitability”.

To counter the rising bad loans, the OJK then decided to impose a temporary measure that allowed banks to restructure loans of institutional customers that had the possibility of becoming bad debts.

The temporary measure, which will last two years, allows banks to change a number of clauses in loan contracts, after reviewing the companies’ cash flows that have been impacted by economic pressures.

Facing the downturn effects, domestic banks have also decided to cut their loan target this year to between 11 percent and 13 percent, from the previous projection of 15 to 17 percent set in early 2015, according to OJK chairman Muliaman Hadad.

Muliaman said the financial regulator was still expecting loan growth to stand within its range of projection by the end of this year, adding that loans in banks of the BUKU I and BUKU IV category grew higher than BUKU II and III.

“BUKU I and IV have the highest loan growth, up tp 12 percent, while BUKU II and III stood around 10 percent. Perhaps BUKU I banks are more aggressive in the micro segment,” he said.

BUKU I is the lowest category and lists banks with core capital below Rp 1 trillion (US$72.85 million), followed by BUKU II with core capital between Rp 1 trillion and Rp 5 trillion. BUKU III category includes banks with core capital between Rp 5 trillion and Rp 30 trillion and BUKU IV — the highest — catalogs banks whose core capital exceeds Rp 30 trillion.

However, Bank Indonesia (BI) economic and monetary policy executive director Juda Agung said the central bank had projected that loans would grow only around 9 to 10 percent by the end of 2015 as the lending trend would remain relatively flat.

The flat prediction indicates that the central bank’s recent monetary relaxation through a cut in the primary reserve requirement ratio (GWM) will only start to impact credits next year.

Bank Central Asia (BCA) president director Jahja Setiaatmadja said an increase in undisbursed loans — lending that had yet to be disbursed — had resulted in lenders’ credits to grow only a maximum 12 percent by year’s end, lower than the expected range of 13 to 15 percent if loan disbursement was at its best.

Bank Mandiri finance and strategy director Kartika Wirjoatmodjo said the lender’s loans would grow within a range of 11 to 12 percent by the end of this year, while predicting that its profits would grow below 10 percent due to rising loan provisions.

Source : The Jakarta Post