KI: Banking Industry Update - Survival of the Fittest

Banking Industry Update

Survival of the Fittest



Cutting growth target further

According to Indonesian banks’ 2014 business plans that have been submitted to Financial Services Authority (OJK), Indonesian banks as an aggregate cut its loan and deposit growth target further from the previous submitted business plans. Loan growth target is cut from 17.5% to 16.5% and deposit growth target is cut significantly from 18.3% to 13.9%, reflecting the tight liquidity reality that most banks in Indonesia have to endure. Although most banks decrease the loan growth target of 2014, loan growth will still outpace deposit growth according to the latest banks’ business plan. Should the plan materialize, liquidity will tighten further until at least the end of 2014. As of June 2014, LDR was 91.2%, increasing from 90.3% as of May 2014. Judging from the fact, we believe that general decrease of time deposit rate in banking industry will not begin soon and the actions from some banks (such as BBCA and BBKP) that have been decreasing their time deposit rates are exceptions rather than the rule.



Deposit franchise and size are kings

The benefit of having a robust deposit franchise is very clear, especially when liquidity is tight such as currently. The luxury of having a stable base of low cost deposit fund more often than not is only enjoyed by sizeable established banks with wide networks of branches, ATMs, and excellent mobile and internet banking services. Throughout first half of 2014, we have observed that banks with high proportion of CASA outperformed their peers. The correlation between CASA ratio and net income performance in 1H14 of banks in our coverage is moderately significant (r = 0.62).



No extreme asset quality deterioration

Asset quality did deteriorate throughout the first half of 2014. NPL increased to 2.2% in June 2014 from 1.8% at the end of 2013. NPL level was unchanged from 2.2% in May 2014. According to the latest central bank estimate, there is still a possibility for a higher level of NPL in second half of 2014 as the central bank expects 2014 NPL will be at 2.3-2.6% range. However, we do not believe that further decrease of Indonesian banking industry’s loan quality will be extreme in magnitude as banks’ aggressiveness for expanding loan book has ebbed.



New nationalistic banking regulation?

The recent draft of Indonesia’s banking bill reveals the lawmaker’s intention to restrict foreign ownership of Indonesian banks. Under the bill, the maximum foreign ownership of banks in Indonesia is capped at 40%, retroactively. Exceptions will be given to banks that are considered to be prudent. Two banks in our coverage, BDMN and BTPN, can be negatively affected should the lawmakers enact the draft.

*Source Ciptadana Research Department