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Bad loans, weak demand stunt banking growth
Despite strenuous efforts in the first half of the year, major banks have yet to recover from ongoing slow growth amid falling profits and rising bad loans
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Despite strenuous efforts in the first half of the year, major banks have yet to recover from ongoing slow growth amid falling profits and rising bad loans.
Latest performance results paint a gloomy picture in the domestic banking industry, following heavy challenges last year, when the country’s economy grew by only 4.79 percent, the slowest growth in six years.
Several major lenders, including state-owned Bank Mandiri and private lender PermataBank, suffered significantly from declining profits and heavy losses caused by non-performing loans (NPLs) that rose after their clients were hit by the economic downturn.
Global slumps in commodity and oil prices, coupled with weak consumer demand, have affected banks’ corporate clients’ balance sheets and their ability to settle their debts, in turn affecting the quality of nationwide bank loans.
Seeing its NPL ratio surge by 59 percent in the first half, Mandiri, the country’s biggest bank by assets, was forced to double its loan-loss provision to Rp 9.9 trillion (US$753.83 million) in the second quarter from the same period last year.
Higher provisions then squeezed Mandiri’s net profits as the bottom line fell by 28.7 percent year-on-year (yoy).
Private lender PermataBank — owned equally by diversified conglomerate Astra International and UK-based lender Standard Chartered Bank — booked a loss of Rp 836 billion in the first half, compared with Rp 837.3 billion in net profits in the same period last year.
The loss was mainly triggered by a 248 percent rise in its provision expense after its gross NPL ratio rose to 4.6 percent from 2.15 percent in the first half last year.
However, being battered heavily does not mean defeat for PermataBank, which is striving to adapt to the changing environment.
“Despite 2016 remaining a challenging period for the banking industry, we are seeing signs that the plan we have put in motion will enable us to get through this period well,” president director Roy A. Arfandy said in a statement recently.
Meanwhile, other major banks, such as Bank Negara Indonesia (BNI), CIMB Niaga, Danamon and Maybank Indonesia, have started to show improvements in their balance sheets as they carry out several strategies, whether through big cuts in expenses, debt restructuring programs or simply focusing on loan growth in certain segments.
Maybank saw its net profits surge by 121.2 percent thanks to better management in several areas after posting hefty losses several years back when commodity prices slumped. The lender, part of Malaysian lender Malayan Banking Berhad (Maybank), has also seen improvement in its corporate banking segment, but is remaining cautious.
“Loan demand from the corporate segment or institutions tends to be higher in the third and fourth quarters,” president director Taswin Zakaria said.
In a recently published report, Moody’s Investors Service stated that the outlook for the Indonesian banking system was stable for the next 12 to 18 months.
Moody’s attributes the outlook to the banks’ strong buffers and slower pace of deterioration in asset quality, despite the pace of deterioration being generally higher than the average pace of the last five years.
Srikanth Vadlamani, Moody’s vice president and senior credit officer, said domestic rated banks’ strong buffers were shown in their high level of pre-provision income, loan loss coverage and capital, all of which will help counter worsening asset quality.
However, loan growth is still predicted to hover in the low double-digits given the existing risks in global markets.
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