T

he surging costs of funds, as a result of an increase in competition, have begun to affect the profitability of the country'€™s mid-size banks, according to the latest report issued by the Financial Services Authority (OJK).

The OJK said that the increase in costs of funds, mainly due to high interest rates on deposit and savings, had caused a decline in return on assets (ROA) of banks, which fall in the BUKU III category '€” banks whose core capital ranges from Rp 5 trillion (US$429.83 million) to Rp 30 trillion.

Based on its weekly survey issued on May 21, banks under the BUKU III category posted ROA of 1.93 percent, lower than the average 3.01 percent booked by the banking industry.

'€œWe noticed that the spread margin reported by BUKU III lenders was relatively tight, mainly because they charged lower lending rates compared to other banks,'€ said OJK deputy commissioner for banking supervision Endang Kussulanjari Tri Subari, during a media briefing on Friday.

On the other hand, she added, banks under the BUKU III category mostly offered higher deposit rates due to an increase in competition to attract third party funds.

'€œThe situation then worsened because the credit guideline set by BI [Bank Indonesia] and the OJK had limited lending expansion, especially in the first quarter [Q1]. So in the end, their costs of funds surged and their profitability was affected,'€ Endang said.

ROA is used to measure banks'€™ profitability, which is generated by their assets. The OJK report shows that the ratios stood at 2.44 percent for BUKU I lenders, 3.01 percent for BUKU II lenders and 3.89 percent for BUKU IV lenders.

There are currently 53 banks in the BUKU I category, with core capital less than Rp 1 trillion; 45 banks in BUKU II, with capital of Rp 1 trillion to Rp 5 trillion; 17 banks in BUKU III; and four banks in BUKU IV, with capital of more than Rp 30 trillion.

The BUKU IV lineup comprises major banks Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Central Asia (BCA) and Bank Negara Indonesia (BNI).

As previously reported, BI jacked up its benchmark interest rate by a total of 175 basis points to 7.5 percent during the June to November 2013 period in an effort to cope with macroeconomic volatility. Domestic lenders then followed suit by raising their interest rates to secure liquidity.

Permata Bank is among the BUKU III lenders that saw its ROA decline. In the first quarter of 2014, its ROA was 1.17 percent, down from 1.36 percent a year ago.

Permata interim president director Roy Arman Arfandy acknowledged the hardship, saying that customers still preferred to keep their money in BUKU IV lenders as they were the largest banks.

Atma Jaya University economist Agustinus Prasetiantoko echoed Roy'€™s sentiment, saying that for the most part, BUKU III lenders were in a difficult position right now. '€œThey have less loyal depositors and they have less competitive fee-based income compared to large banks.'€

However, despite contraction in the BUKU III category, the OJK estimates that the industry'€™s ROA will hover around 3 percent this year, similar to the 3.08 percent reported in 2013.