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Analysis: Better prospects for loan growth in 2015
Loan growth slowed to 11
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Loan growth slowed to 11.58 percent year-on-year (yoy) to Rp 3.7 quadrillion at the end of 2014, compared with 11.9 percent in November, and significantly lower than the 21.6 percent growth in 2013. The growth in lending has been slowing for 14 consecutive months, after Bank Indonesia (BI) began its monetary tightening policy in June 2013.
The only type of loans that showed growth were consumer loans. Working capital-loan growth slowed to 10.8 percent (versus 11.9 percent in November), investment-loans growth slowed to 13.2 percent (versus 13.7 percent in November), while consumer-loans growth increased to 11.5 percent (versus 10.8 percent in September).
Among business sectors, loans to real estate, business, ownership and business services contracted 14.9 percent yoy. The contraction in the sector has been deepening in the past seven months. Meanwhile, loan growth in wholesale and retail trade and agriculture, hunting and forestry slowed ' each to 11.3 percent (versus 13.1 percent in November) and 19.9 percent (versus 21.5 percent in November).
Business sectors that showed growth in December compared to the previous month were construction (26.9 percent versus 26.8 percent in November), provision of accomodation and the provision of eating and drinking (24.1 percent versus 21.8 percent in November) and mining and quarrying (11.8 percent vs 6.2 percent in November).
At the same time, deposit growth slowed for the second month, to 12.3 percent from 13.8 percent in November, as all types of deposits slowed. Demand-deposit growth slowed significantly to 5.1 percent from 7.3 percent; savings-deposit growth slowed to 5.9 percent from 6.9 percent; and time-deposit growth slowed to 20.9 percent from 22.5 percent.
The increase in deposit rates by banks has moderated since September 2014. Banks have been aggressively increasing rates on time deposits since BI began to increase the BI rate in June 2013.
Loan-to-deposit ratio (LDR) increased to 89.4 percent from 88.7 percent in November, as both credit and deposit growth slowed. Overall, the LDR had been stable, below 90 percent as deposit growth has been consistently higher than credit growth in the past four months.
On the other hand, non-performing loans (NPL) fell to 2.16 percent from 2.26 percent. NPL in most sectors has been decreasing over the last two months of 2014, as banks have already written off bad loans.
Other banking sector ratios were relatively stable in 2014. Capital adequacy ratio dropped slightly to 19.6 percent from 19.8 percent in the previous month, but grew compared to the 18.1 percent growth in 2013. Operating expenses to operating income ratio remained stable as well, at 76.3 percent, and liquid asset ratio was stable at 16.2 percent.
We expect credit growth to improve this year. According to banks' business plans surveyed by BI, banks expect to grow lending by an average of 17.5 percent nationwide. We believe that there are two major factors that will make banking credit this year increase.
First, Bank Indonesia had finally cut the BI rate and deposit-facility rate by 25 basis points (bps) to 7.5 percent and 5.5 percent, respectively. It was the first time the central bank lowered the policy rate since the tightening cycle began in June 2013. The move was largely unexpected, because even though inflationary pressures eased, the possibility of the Fed increasing the Fed's funds rate in the middle of the year has increased as US economic growth continues to improve. But overall, lower policy rates will have a positive impact on credit growth.
Second, we expect the Indonesian economy to grow faster this year, to 5.5 percent, compared with 5.02 percent in 2014. The government will have more fiscal room to spend on productive sectors after revising the 2015 budget. We see that the government has proven its commitment to creating a pro-growth budget by prioritizing capital spending.
Productive spending now accounts for 21 percent of total central government expenditures, compared with an average of 14 percent of total government spending from 2007 to 2014. Meanwhile, the energy subsidy accounts for just 10 percent of total government expenditures now, compared with an average of 21 percent from 2007 to 2014.
It is the first time since 1997 that capital spending has surpassed the energy subsidy. We are hoping the realization of the planned spending will improve this time as capital disbursement only averaged 85 percent in the 2010'2014 period compared to the total target.
We predict loan growth to slow over the next couple of months before it finally begins to improve. Usually, it takes around three to six months for banks to lower credit rates after a policy rate cut. The one more sensitive to the policy rate change is deposit rates, which adjust to the policy rate in the same month of the policy change, or one month later at the maximum.
We believe there is still room for BI to make a further cut to policy rate, by 25 bps this year, as inflation is expected to continue to moderate, the current account deficit to improve, and the potential for inflows to the domestic capital market, buoyed by the European Central Bank stimulus. But the rate cut has to be done before the Fed eventually increases the funds rate to anticipate the currency fluctuation. The monetary authority will have to be very cautious about the global economic condition because the trend now is the appreciation of the US dollar against other major currencies, especially against the euro.
With the assumption of 5.5 percent gross domestic product growth and a BI rate of 7.25 percent this year, we predict loan growth will improve to around 16-17 percent this year.
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The writer is a financial market analyst at PT Bank Mandiri (Persero).
