Riding out Indonesia’s challenging banking scene
COMING out of a difficult 2016, Indonesian lenders are generally expecting some improvements this year although there’s still a long way before things go back to what they used to be.
Blame it on soft economic growth which is tied to the lending business, for one.
Mundane economic expansion has affected the Indonesian banking industry where credit growth was at just 8.5% as of March, while in 2014, it was almost double that.
In 2017, South-East Asia’s biggest economy grew by 5.07% while in 2016, it grew 5.02%.
This year, expectations are for it to expand slightly more at 5.2%.
Malaysia’s two largest banks, Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd which own banks in Indonesia think that despite a continued challenging environment, there are some bright spots.
Maybank Indonesia president director Taswin Zakaria says in terms of loans, the bank is still aiming to have a “slightly stronger” loan growth in 2018 than 2017 with focus areas like corporate banking, retail small and medium enterprise (RSME) and business banking and credit cards.
“In terms of income, our global markets (treasury), cash management and trade fee will continue to be key fee income contributors, with an expansion in treasury products including structured products, both conventional and shariah,” he says.
It plans to achieve these targets – which he did not specify – helped by partnerships, “disciplined” pricing strategies and by increasing the use of its e-channels.
Nevertheless, Taswin remains very cautious. He points out that Indonesia’s economic growth is “still low” and the banking industry is facing stiff competition. “Loans remain one of the most important areas for growth and continues to be challenging moving forward.”
Maybank Indonesia is currently a relatively small contributor to Maybank’s overall profit, contributing about 5.5% of its pre-tax profit as of its FY18’s first quarter,
The lender’s retail bank loans shrank in the recent quarter as it undertook a number of transformation initiatives in the retail segment, which it now hopes to start expanding.
Maybank’s closest competitor, CIMB which runs its Indonesian banking business via PT Bank CIMB Niaga cautions that CIMB Niaga’s margins are expected to ease this year to around 5% from 5.6% in 2017 on the back of lower lending spreads.
The lower spreads are the result of the lender focusing on higher quality clients, and higher cost of funds from the rising interest rate environment, according to its president director and CEO Tigor M Siahaan.
“To meet this challenge, CIMB Niaga will intensify efforts to improve its current account, savings account or CASA ratio, which presently stands at 55%, via various product and delivery innovation strategies.”
Another key focus for CIMB Niaga is to leverage on its digital banking capabilities in order to enhance customer experience, he adds.
Tigor says CIMB Niaga continues to be a core contributor to CIMB Group “given the potential growth prospects of the banking and financial industry as proxies to the Indonesian economy.”
He is slightly more bullish on Indonesia’s current economic environment, saying that should growth persist on its current trajectory, there are expectations that Indonesia’s contribution could increase to as much as 30% of group pretax profit as it did in 2012.
Indonesia contributed 15% to CIMB’s pre-tax profit in the first quarter of FY18.
Collectively, Maybank and CIMB reportedly control about 7% of the Indonesian banking market as of the middle of last year.
At 7%, this is considered relatively significant compared to the presence of Indonesian commercial banks in the Malaysian market which is practically nil. Notably, state-owned PT Bank Mandiri Tbk has plans to open a branch office here soon. To be sure, Malaysian banks remain hungry for a slice of the Indonesian market although some quarters say that local lenders were already late entering the Indonesian market some ten years back amid growing, intense competition.
Nevertheless, interest is there and this is understandable as the Indonesian market has many compelling factors going for it including a huge population comprising a growing middle-income class which will want access to a variety of financial products and services as their wealth level increases.
Recall, in February, Indonesian media reported that Affin Bank Bhd was interested in buying up to a 40% stake in PT Bank Bukopin Syariah (BSB), with interest indicated as early as last year. RHB Capital Bhd was also poised to enter the Indonesia market a few years back but later called off plans to acquire a 40% stake in PT Bank Mestika Dharma after failing to get approval from the Financial Services Authority of Indonesia (OJK).