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Tough competition compels banks to reform
Banks in Indonesia will have to reinvent themselves soon amid persistent economic turbulence, global management consulting firm McKinsey & Company has warned
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span>Banks in Indonesia will have to reinvent themselves soon amid persistent economic turbulence, global management consulting firm McKinsey & Company has warned.
The New York, United States-based consulting firm published a report on Tuesday showing that banks in the Asia-Pacific region have endured weakening macroeconomic expansion and consistent banking margin compression, as well as rising costs of capital and risk.
Out of the 12 countries highlighted in the study, Indonesian lenders suffered the third-fastest margin decrease of 4.6 percent, after China’s 8 percent and Japan’s 5.2 percent. However, the figure was still slightly lower than the Asia-Pacific average of 4.9 percent.
McKinsey’s Jakarta partner, Guillaume de Gantès, said the intense competition between banks and burgeoning financial institutions in Indonesia had hampered traditionally run lenders in their performance.
He argued that the country was nonetheless doing “much better” than other countries in the Asia-Pacific region. Indonesian banks, he said, had maintained a relatively high return on equity (ROE) of 13.2 percent last year despite falling from 17.4 percent in 2014, which still beat the Asia-Pacific average of 10.1 percent in 2018.
“We’re coming down quite fast,” De Gantès told The Jakarta Post in a phone interview. “But actually, we think that a lot of [problems] could be opportunities for the banks themselves.”
For instance, banks could gain from digital disruption by employing digital platforms and analytics that could help slash their costs, especially since Indonesia showed one of the highest cost to asset ratios of 635 basis points (bps) last year compared to other Asia-Pacific countries.
Thus, opening up to collaborating with other financial players like financial technology (fintech) companies could produce long-term benefits, especially since the study showed that the country’s digital penetration of 58 percent as of last February was 1.6 times higher than the rate it recorded in 2014.
The firm also saw immense potential in fast-growing businesses like small and medium enterprises (SMEs) lending, which is expected to grow 9.1 percent annually to US$23 trillion in 2025.
“So there’s a lot of room to grow,” De Gantès said. “Banks have to find ways [...] to stay at the center of people’s lives or else it will be very difficult to stay relevant.”
Responding to the study, state-owned lender Bank Mandiri finance director Panji Irawan said that although he had seen a net interest margin (NIM) decrease since mid-2018, he blamed the central bank’s gradual increase of its seven-day reverse repo to the current rate of 6 percent for compressing such margins.
Consequently, Bank Mandiri recorded a NIM decrease to 5.66 percent in this year’s first quarter, just under the 5.8 percent it recorded within the same quarter in 2018. In the same period, fellow state-owned lender Bank Negara Indonesia also revealed a year-on-year decrease to 5 percent from 5.4 percent while that of Bank Rakyat Indonesia fell to 6.89 percent from 7.49 last year.
He nonetheless painted a rosy picture for state-owned banks’ future after recent data suggested that Indonesia had a comparatively higher return on assets, NIM and capital adequacy ratio (CAR) compared to other ASEAN countries. The country also has a relatively low market penetration that banks could benefit from, Panji argued.
“We agree that [McKinsey’s recommendations] are important strategies,” Panji said. “But we are currently wary of SMEs financing and other fast-growing businesses, which are prone to the economic cycle and global uncertainties.”
But Center of Reform on Economics (Core) Indonesia research director Piter Abdullah argued that McKinsey’s recommendations were unsuitable for banks in the lower quartiles as cutthroat competition had hit them with tightening liquidity and a higher cost of funds
Bank Permata economist Josua Pardede shared Piter’s sentiment but expressed high hopes that consolidation would provide enough capital to survive and to diversify banking products for banks outside the country’s four largest players, which account for half of the industry’s market share. Ultimately, the mergers will push down the national cost-to-income ratio, making the industry more efficient overall.
“So if we want to compete regionally, we have to have a holistic approach in seeking capital that promotes a healthy and stable economy through a slimmer banking industry,” Josua said.
