Bankers were relieved with the close of 2009. It was a tough year, although the Indonesian banks weathered the impact of the global recession fairly well. Assets grew a mere 4 percent, loans only 5 percent and deposits 6 percent. But the concern was on asset quality, with non performing loans rising to 4 percent, a bit close to the 5 percent benchmark, that if exceeded, gets banks into the regulators watch list. However, bank capital levels, which cushions market shocks, remains a comfortable 18 percent.
In contrast, bankers have high hopes for 2010. For one the economy is looking better. Most economists’ forecast a 5 to 6 percent growth rate, a percentage higher than 2009. Secondly, with inflation still low – although trending upwards -- interest rates are still expected to fall in the single digit range, which should keep bank cost of funds low and consequently less pressure on net interest margins. As a result, most banks are targeting 20 percent loan growth for 2010. Following from this non-performing loan levels, which were rising in 2009, should come under control and conversely bank profits should improve.
The cautious optimism is not limited to Indonesia. Other major economies are also forecasting a gradual economic recovery. This bodes well for commodity prices, which fuels the country’s natural resource exports and ultimately helps keep the currency stable. A stable currency and positive economic growth should, in turn, attract foreign investment, which should spur the economy further, the argument goes.
But amid the rosy blue skies, there are a scattering of clouds forming out on the horizon. The hardest to predict would be the outcome of the parliamentary investigation of the Bank Century bailout, which is increasingly becoming political and personal between Golkar Party chairman, Aburizal Bakrie and Finance Minister, Sri Mulyani. A change in the composition of President Susilo Bambang Yudhoyono’s top economics minister, should this occur would not be a good sign for the market and raise uncertainty as to the tone and direction of the country’s economic policy.
The promotion of the former director general of taxes, Darmin Nasution, to Bank Indonesia has made the central bank more proactive to regulate what they regard as market excesses. One item that was high on their list was the high lending rates, which the authorities regarded as stubbornly high, especially after moving down their benchmark SBI rates. In the latter part of 2009, they moved to effectively cap deposit rates, at 8 percent, then further down to 7 percent in December. For the year, the state banks and the regional development banks (BPDs) were the only banks that were significantly growing their loan portfolio. To fund this growth they aggressively took in deposits by bidding up deposit rates.
The growing concern among bankers is whether the regulators would go further and cap lending rates as well, which would squeeze bank net interest margins. Unfortunately, this would impact consumer and micro loans, which carry higher margins, reflecting their higher risk and maintenance costs.
Analysts argue that this could significantly curtail lending to this large and increasingly important sector.
The year 2010 is also a year that several regulations are scheduled to become effective.
One of these is the implementation of BIS’ operational risk in calculating a bank’s capital adequacy ratio. The impact of this additional operational risk charge is a reduction in a bank’s capital levels. The regulators have extended the effectiveness of this ruling from 2009 to a phased approach stretched over three 6-month periods. The operational risk charge would be calculated based on a charge against the bank’s average gross revenue of the past three years, starting with 5 percent for the first six months of 2010 to 10 percent for the remainder six months of 2010 and finally 15 percent starting 2011. Bankers that have made these calculations note that the impact to the bank’s capital levels would be a 3 to 4 percentage cut, which is a significant drop and hinders loan growth. Some banks are already planning sub-debt issuances, just in case.
In 2010, banks’ financial reports have to adhere to international accounting standards. One impact would be on loan provisioning. Instead of the current system of assessing the quality of a bank’s portfolio by classifying into five collectability categories (current, special mention, substandard, doubtful and loss) and setting aside loan loss provisions (respectively, 1 percent, 5 percent, 15 percent, 50 percent and 100 percent of each loan), banks will be calculating provisions based on default probabilities and taking into account potential recoveries as well. The impact would be larger provisions during a downturn in the economy and conversely smaller provisions in an upturn. Another impact would be more positive for banks considering acquisitions and mergers. Goodwill, which is the difference between the price one pays for buying a bank and its book value, would not have to be amortized, as it is now done and thus has a more favorable impact on the banks bottom line.
Another regulation that would impact only the state banks in 2010 would be the single presence policy, which requires the government to either merge of place the two state commercial banks, Bank Mandiri and Bank Negara Indonesia under a holding company for eventual merger. It remains to be seen how this phased consolidation would actually take place. Similarly, it is the year for the government’s Financial Service Authority (Otoritas Jasa Keuangan) to be set up, which will bring the supervisory bodies of all financial institutions, covering banks, finance, security and insurance companies under one umbrella organization. There has been some reluctance by Bank Indonesia to spin off its bank supervisory unit under OJK’s supervision. Some analysts feel that OJK will most likely play a more coordinating role and that the supervisory role will remain in the units spun off from Bank Indonesia as well as the Finance Ministry.
The above regulatory moves require a decisive government, which unfortunately is not apparent, with the Finance Minister Sri Mulyani and Vice President Boediono dragged into a prolonged parliamentary investigation. Adding to the government’s woes is the problem faced by the central bank, which has been operating without a governor for several months. Bankers, though, will be counting more on the economy, because if it does grow beyond the projected 5 percent, it should still clear the skies for next year.
Manggi Habir is a staff writer at The Jakarta Post. Anton Gunawan is Bank Danamon chief economist.
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