F

or better or worse, Indonesia’s banks still achieve the highest margins among their regional peers, maintaining their allure for investors, despite the headwinds and occasional crises they have faced in recent — and perhaps upcoming — years.

A whopping 95 percent of respondents surveyed by global finance consulting firm PricewaterhouseCoopers (PwC) believe that Indonesia, the largest economy in Southeast Asia, is more attractive compared to its neighbors.

Referring to PWC’s “Indonesian banking survey 2017,” high margins are still the cherry on top of Indonesia’s banking cake for 31 percent of respondents who have been won over by the country’s charm. The banking sector recorded 5.63 percent net interest margins (NIMs) last year, up from the 5.39 percent seen in 2015.

The country’s huge population but relatively low banking penetration, providing vast room for expansion, is the next most attractive aspect for the respondents, followed by prospective economic and lending growth.

“Indonesia has great potential in the banking industry,” said Chan-Cheong Siew, the director of Strategy&, a part of the PwC network, during the survey result presentation on Wednesday. “We are enjoying very high NIMs but it depends on the size of the bank and the [business] models.”

The firm surveyed 78 respondents from 58 lenders in the country, representing 87 percent of the banking assets. The respondents came from the upper management of the respective lenders, comprising local and foreign banks.

The survey shows that the spread of Indonesian banks’ NIMs was between 2 and 8 percent, compared to around 4 percent in the Philippines, between 2 and 3 percent in Malaysia and 2 percent in Singapore, according to data compiled by PwC.

However, as if the slowing economy has not done enough to challenge the industry, the government and the Financial Services Authority (OJK) have urged banks to lower their interest rates to support economic growth, which has sparked concerns of reduced banking profitability.

Around 54 percent of the respondents expect a NIM reduction this year, up from 29 percent of respondents in 2015 and 32 percent in 2013. Furthermore, 68 percent of them expect only moderate increases in profitability this year.

Lower NIMs will reduce profits but the situation will be supported by an expansion in lending as a result of the more attractive interest rates, PwC partner Jusuf Wibisana said.

“Indonesia’s banking industry will remain interesting because even if its NIMs are compressed, they’re still relatively high compared to neighboring countries,” he said. Banks, he added, would also see increased profits from fee-based income.

The economic slowdown last year squeezed loan disbursement growth, to only 7.87 percent, from 10.1 percent in 2015. The ratio of bad loans compared to total loans, known as the non-performing loan (NPL) ratio, stood at 2.9 percent last year from 2.5 percent in the previous year.

Despite the challenges, the industry demonstrated its resilience last year. The financial services industry, whose contribution to the gross domestic product (GDP) is ranked seventh at 4.2 percent, recorded 8.9 percent growth last year, the highest of all sectors.

“The banking industry in Indonesia remains attractive. Although the NIMs may decrease, many initiatives are being carried out [by banks] to reduce overheads while improving risk management, resulting in lower costs,” state lender Bank Rakyat Indonesia (BRI) treasury director Haru Koesmahargyo wrote in a text message to The Jakarta Post.

He also sees high growth potential in fee-based income, with his firm, as the country’s most profitable lender, gaining extra income from electronic banking services and trade transactions.

Analysts have also expressed a similar view, saying the sector remains lucrative amid growing loan demand backed by economic recovery, as shown in higher loan growth targets compared to last year. “However, regulatory intervention on lending rates could be a key downside risk for banks’ NIMs,” Mirae Asset Sekuritas Indonesia research head Taye Shim wrote in a text message.

The survey appears to be validated by China’s second-largest bank, China Construction Bank Corporation (CCB), being the latest to officially enter the Indonesian market. It launched its local brand CCB Indonesia last week.

Publicly listed CCB Indonesia, in which CCB holds a 60 percent stake, is the result of a merger between PT Bank Windu Kentjana International and PT Bank Antardaerah in November 2016.