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Bad loans haunt Indonesian banks
Despite the prospect of higher loan demand this year, a number of local banks will likely have to maintain a conservative stance as they forecast ongoing credit quality risks
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Despite the prospect of higher loan demand this year, a number of local banks will likely have to maintain a conservative stance as they forecast ongoing credit quality risks.
The banks have observed evidence that the rising trend of bad loans, which started last year, may continue throughout this year, as some of their clients had continue to struggle with the lingering effects of the global economic slowdown.
The sluggish trend has been affecting the banking industry’s non-performing loan (NPL) levels since the third quarter last year and is predicted to continue in the upcoming months, state-owned lender Bank Mandiri president director of Kartika “Tiko” Wirjoatmodjo said
“The banking industry is still consolidating because we have yet to see ongoing impacts on asset quality. Economic growth decline has reduced the loan payment ability of our clients,” he said recently.
Mandiri, the country’s biggest lender by assets, is among banks affected by soaring bad loans owing to loan growth contraction, forcing the bank to increase provision, which then affected its net profit in the first quarter this year. Its gross NPL rose to 2.89 percent between January and March, from 1.81 percent in the same period last year.
Mandiri’s rising NPL mainly occurred in the middle segment, or also known as the commercial loan segment, which mainly refers to commodity based businesses operating in regions that source their incomes from natural resources, Tiko said.
As global commodity and oil prices fell, he said companies operating in the natural resources-based sector, such as coal mining, had significantly suffered and experienced difficulty in paying their loans.
“We saw that this trend had widened to other industries, such as cigarette and steel manufacturing, even though the impact was not as big as in commodity based ones,” he said.
Private lenders PermataBank and CIMB Niaga have also seen their net profits nosedive, caused by rising bad loans last year, mainly due to their significant exposure in mining and commodity related sectors.
PermataBank saw a loss of Rp 376 billion (US$28.2 million) in the first quarter of 2016, but CIMB Niaga posted a 224.1 percent year-on-year (yoy) jump in net profit after a year of decline as it saw improving revenues and credit quality. CIMB Niaga’s NPL, meanwhile, dropped to 3.9 percent in the first quarter of 2016, from 4.07 percent in the same period last year.
The banking industry saw nationwide NPL increase gradually to 2.46 percent, 2.56 percent, 2.7 percent and 2.8 percent in May, June, July and August last year, respectively, Financial Services Authority (OJK) data shows.
Standard & Poor’s (S&P) global ratings credit analyst Ivan Tan said in his latest report that Indonesian banks’ NPL would continue to increase to around 3 to 4 percent this year in accordance with the regional trend due to external macroeconomic headwinds.
Tan said the rating agency had assumed that the credit quality would deteriorate gradually, rather than spike sharply. However, the ASEAN banks’ high capitals would act as sufficient buffers to remain resilient to global risks this year, he added.
The country’s banking authority acknowledged the worsening performance of some banks during the first three-month period of this year, but maintained the belief that it was not an alarming condition as it had been predicted by the regulator.
“We are still optimistic about national economic growth this year, meaning that if the country’s development improves, it will be reflected in loan demand growth,” OJK chairman Muliaman D. Hadad said recently.
Gadjah Mada University economist Tony Prasetiantono, meanwhile, expressed a similar view, saying that the banking industry could pin its hopes on the country’s gradual economic improvement if the government could maintain stable macroeconomic indicators, especially exchange rates.
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