Sanat Vallikappen and Berni Moestafa
The lime-green Yamaha Mio motorbike that Suryadi bought in 2011 to commute to his job pumping gas in Jakarta would have cost 11.8 million rupiah ($1,221) had he purchased it outright. Instead he took out a loan at 16 percent.
Now the 44-year-old father of three is making monthly payments to PT Bank Danamon Indonesia (BDMN) that eat up about one- fifth of his salary. He’ll end up paying 46 percent more than the cost of the bike by the time he retires the loan.
“I don’t have the money to pay in cash,” said Suryadi, who like many Indonesians goes by one name. “Paying in installments is all I can afford.”
Borrowers like Suryadi have helped make Indonesian lenders the most profitable among the 20 biggest economies in the world, according to data compiled by Bloomberg. The average return on equity, a measure of how well shareholder money is reinvested, is 23 percent for the country’s five banks with a market value more than $5 billion, the data show.
That’s greater than Chinese banks of the same size, which have an average return of 21 percent, and Canadian firms with 20 percent. It’s more than double the 9 percent in the U.S. Profitability might have been even higher if Indonesia’s lenders weren’t also among the most inefficient, as measured by the ratio of operating expenses to total assets.
Interest Margins
Returns in Indonesia, Southeast Asia’s largest economy, are driven by net interest margins, the difference between what banks charge for loans -- an average of 12 percent, according to the central bank -- and what they pay for deposits. The average margin for the country’s big banks is 7 percentage points, the highest of the 20 economies, according to the latest available data compiled by Bloomberg.
“It’s a basic supply-and-demand equation,” said Ken Timsit, a Jakarta-based partner and managing director at Boston Consulting Group, which has studied the profitability of banks worldwide. “There’s plenty of demand for credit, but limited supply,” making it lucrative for banks to lend.
The profitability of lenders including PT Bank Rakyat Indonesia (BBRI), whose 34 percent return on equity is the highest, and PT Bank Central Asia (BBCA), the largest by market value, contrasts with that of Western counterparts such as Deutsche Bank AG (DBK), Barclays Plc (BARC) and UBS AG (UBSN), which have lowered targets as they reduce risk-weighted assets to meet higher capital requirements.
Global banking return on equity fell to 7.6 percent in 2011 from 8.4 percent a year earlier, below the 10 percent to 12 percent average cost of equity, McKinsey & Co. wrote in an October report. U.S. banks had an average return on equity of 7 percent in 2011, while European lenders earned zero -- or 5 percent excluding the most indebted nations such as Spain and Greece -- according to the study.
Takeover Target
Indonesia’s high net interest margins have prompted banks such as DBS Group Holdings Ltd. in Singapore, where the figure averages 2 percent, to look at acquisitions. DBS, Southeast Asia’s biggest lender, made a $6.8 billion bid in April for 99 percent of Bank Danamon and is awaiting regulatory clearance.
At odds with the profitability of Indonesia’s banks is their inefficiency. The ratio of operating expenses to assets, a measure of the cost of providing services, ranges from 2.5 percent to 4 percent at the country’s biggest lenders, according to Boston Consulting Group’s Timsit. It’s 2 percent in Malaysia and 1 percent in Singapore, he said.
The higher expenses are largely a function of Indonesia’s geography, said Alexander Chia, a Kuala Lumpur-based analyst at RHB Capital Bhd. (RHBC) With 17,508 islands, 6,000 of them inhabited, and with more than two-thirds of the country’s 242 million people living in rural areas, it costs more to operate and staff a branch network, he said.
‘Not Efficient’
“Indonesian banks’ efficiency is still lacking compared with other countries,” said Robby Hafil, an analyst at PT Trimegah Securities (TRIM) in Jakarta. “Our banks are trying to cover operational costs by increasing net interest margin, and as long as operations remain inefficient this practice will continue.”
Indonesia’s banking regulator agrees that the system isn’t efficient and relies on high interest rates for profits.
“They want to give a higher lending rate because the cost of providing banking is too large, because they are not efficient right now,” Hartadi Sarwono, a deputy governor of Bank Indonesia, the country’s central bank, said in an interview in November. “If they reduce the cost, then they can reduce the lending rate, and not necessarily reduce profits.”
Inflation Rate
Indonesia’s history of inflation, averaging 7.3 percent in the past 10 years, has kept benchmark interest rates for the past year at 5.75 percent, one of the highest among major economies, data compiled by Bloomberg show. The country’s benchmark rate, as high as 12.75 percent in April 2006, is lower only than Russia’s 8.25 percent, India’s 7.75 percent, Brazil’s 7.25 percent and China’s 6 percent.
“For consumers, the interest rates still feel low given that Bank Indonesia’s benchmark interest rate is at a record low,” said Isfhan Helmy, a Jakarta-based banking analyst at PT Sucorinvest Central Gani.
The lower benchmark rate, along with a March 2011 central bank rule requiring banks to keep loan-to-deposit ratios above 78 percent, has helped spur lending. Halim Alamsyah, another Bank Indonesia deputy governor, said in Jakarta Jan. 10 he expects loans to increase 23 percent this year.
Consumer Loans
Much of the gain has come in retail and consumer loans, which are more profitable than those to companies, said Pahala Mansury, director of finance at PT Bank Mandiri (BMRI), which is 60 percent owned by the government and Indonesia’s second-largest lender by market value.
Bank Mandiri’s microlending, consumer and small-business units accounted for about 30 percent of total loans at the end of September compared with 25 percent three years earlier, according to company filings. The segment contributes 50 percent of the lender’s revenues now and may account for 40 percent of its loan portfolio by 2014, Mansury said.
Bank Central Asia increased its consumer loans by almost 50 percent in the quarter ended Sept. 30 from a year earlier. It accounts for 27.5 percent of the lender’s total loans compared with 25 percent a year earlier.
Nonperforming loans, at record lows of 2 percent for Indonesia’s banks, could increase this year as a result of the rapid rise in lending, according to a Nov. 19 Fitch Ratings report. Banks will be able to sustain profitability because they’re making adequate provisions to cover losses, Fitch said.
The top five banks by market value account for almost half the loans in Indonesia’s banking system. Bank Danamon, which has a unit dedicated to vehicle loans that caters to borrowers like Suryadi, had the highest net interest margin at 9.84 percent, according to data compiled by Bloomberg. It was followed by state-controlled Bank Rakyat with a margin of 8.37 percent.
Bank Profits
Rakyat’s 2012 profit rose 23 percent from a year earlier to 18.5 trillion rupiah, the highest on record since 2000, it said in a statement on Jan. 31. The profit growth is the result of the bank strengthening its focus on microlending, it said.
Citigroup Inc. (C), the second-largest Western bank in Indonesia with 22 branches in six cities, has a net interest margin in the country of 4 percent, according to Tigor Siahaan, chief country officer for the New York-based company. About 65 percent of profits come from business dealings with large companies, which explains thinner margins than some of the local lenders that focus on consumers, Siahaan said.
The lender was banned in May 2011 by Bank Indonesia from adding new wealth-management clients for one year and new credit-card clients for two years after an employee was accused of stealing $5 million from her clients and a customer died at a branch following meetings with Citigroup debt collectors. The bank said it would return the stolen money to customers. An internal investigation into the death didn’t reveal any physical violence, the company said.
Loan Ratios
As profitable as lending in Indonesia is, banks have made loans to only 28 percent of the population, or about 67 million people, according to World Bank data. Loans outstanding at the country’s 120 commercial lenders totaled $272 billion at the end of November, according to central bank data. That’s about 30 percent of 2011’s gross domestic product, the lowest loans-to- GDP ratio among major Asian markets, said Stephan Hasjim, a Jakarta-based analyst at Nomura Holdings Inc.
Neighboring Singapore and Malaysia have loans-to-GDP ratios of 150 percent and 125 percent respectively, according to data compiled by Bloomberg, based on cumulative loans outstanding at the end of the most recent month for which data is available and 2011 GDP figures.
Economic expansion in Indonesia, the world’s 16th-largest economy, will average 6.4 percent from 2013 to 2017, the Organization for Economic Cooperation and Development estimated in a Nov. 18 report. Its GDP was $846 billion in 2011, according to International Monetary Fund data.
‘Serious Issue’
Still, the country’s banks may have difficulty improving the loans-to-GDP ratio unless they expand their deposit base, Bank Mandiri’s Mansury said. That’s because the central bank capped the loans-to-deposit ratio at 100 percent to prevent excessive risk-taking. It’s 85 percent now, compared with Singapore’s 95 percent and Malaysia’s 78 percent. A ratio above the maximum is allowed only if a bank’s combined Tier 1 and Tier 2 capital exceeds 14 percent of risk-weighted assets.
“Maybe there is demand to borrow, but whether banks can provide the kind of liquidity that is required in the next four to five years will become a very serious issue,” Mansury said, citing deposit growth that hasn’t kept pace with loan growth.
Through the first 11 months of last year, total loans in Indonesia’s banking system increased 20.3 percent to 2,647 trillion rupiah, while deposits rose 12.4 percent to 3,130 trillion rupiah, according to Bank Indonesia.
It’s a “cash society,” Mansury said. “Even money that is in Indonesia isn’t being deposited in the banking system.”
Shadow Banking
In a survey of new microlending customers last year, Bank Mandiri found that only 30 percent had any formal financing before coming to the bank, Mansury said. Customers said they were willing to borrow from commercial lenders because rates are lower than those charged by informal financing networks.
Shadow-banking borrowers pay as much as 50 percent a year, according to Syafrien Anwar, a former senior sales manager at PT Nusantara Capital Securities. Shop owners can be charged an overnight interest of about 5 percent, he said.
Indonesian banks are wary about lending as a result of the Asian financial crisis of 1997-98. The economy shrank 13 percent in 1998, and the country took a $43 billion IMF bailout as its currency slumped, companies defaulted on debt and more than 80 banks failed or were nationalized or recapitalized.
“Everyone has in mind what happened in 1998, and all the bankers are very conscious of the importance of being prudent with their balance sheets and knowing who they lend to,” Boston Consulting Group’s Timsit said.
Fee Income
A scarcity of data about borrowers’ creditworthiness and the relatively high interest rates charged by banks, some reaching 30 percent according to a Citigroup report, also contribute to low loan penetration, he said.
Profits “are commensurate with the needs of the economy, and what can really make the net interest margins go down will be better bank infrastructure, better customer data, better creditor data and better identification, rather than pressure from the regulator to reduce interest rates,” Timsit said.
When margins start falling, fee income from activities such as trade with other countries, investment banking and insurance should pick up, contributing to profits, he said.
That view is shared by Citigroup’s Siahaan, who said he expects non-interest income from activities such as cash management, trade and foreign-exchange hedging, currently about 30 percent to 35 percent of the firm’s business in Indonesia, to increase as companies stop treating banks just as loan houses.
‘Very Easy’
“A loan is a very easy product to sell,” Siahaan said. “Our money is not going to be much more beautiful than that of the guy next door. But if I advise our client on a different hedging strategy that makes sense to his portfolio and his assets, depending on what’s the latest view in Europe and the global economy, including the currency markets, then that’s a very different proposition.”
Other foreign banks that have stakes in Indonesian lenders include Malayan Banking Bhd. (MAY), which holds 97.5 percent of PT Bank Internasional Indonesia (BNII), according to the Malaysian firm’s website. Qatar National Bank SAQ (QNBK) owns 69.6 percent of PT Bank Kesawan, and Standard Chartered Plc 45 percent of PT Bank Permata (BNLI), data compiled by Bloomberg show.
Central bank measures such as lowering benchmark rates and encouraging more competition in lending are expected to push down interest margins, Fitch wrote in its November report. Last year the central bank also required banks with assets exceeding 10 trillion rupiah to make public their prime lending rates, the percent they charge their most creditworthy customers.
Continued Appetite
“Competition will drive these very high margins down going forward, but it may take many years,” Nomura’s Hasjim said.
Meanwhile, high rates haven’t curbed Suryadi’s appetite for borrowing. He’s saving up money to build a house that may cost about 50 million rupiah.
“I really want this house,” the gas-pump operator said. “I would like to borrow some money.”
To contact the reporters on this story: Sanat Vallikappen in Singapore atvallikappen@bloomberg.net; Berni Moestafa in Jakarta at bmoestafa@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
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