The prospect of a BI rate hike this year could dampen loan growth, but it is tempered somewhat by the fact that loan rates have fallen faster than corporate profits during the pandemic. But in the medium term there are significant challenges, notably (1) the rise of fully digital neobanks; (2) mandated increases in SME lending by regulators; and (3) increased awareness of environmental/climate-related issues. The efficiency of banking would naturally follow the economy.
It is fair to say that Indonesia's banks have remained remarkably healthy despite the contraction in GDP earlier in the pandemic. In theory, this should limit lending volumes, but an argument can be made that the prospect of rising interest rates in the short term would stimulate borrowing, especially against the backdrop of growing corporate profits. But the trend reversed during the pandemic and – as profitability soared in the third quarter of 2021 – the interest rate differential xx.
This does not mean that loan growth will necessarily return to those tumultuous days, but it does mean that there is considerable room (around 100-150 bps) for BI and banks to raise rates without overly constraining loan growth. To be fair, there is a small risk that interest rates could rise even faster, mainly due to inflation. And even in the absence of such an adjustment, some companies are already seeing an erosion of their profitability due to rising costs of imported raw materials, which may in turn reduce their appetite for expansion or borrowing.
This in turn caused an increase in the cash reserves of corporations (on a mark-to-market basis) and in the transaction volumes of brokers/asset managers – both of which caused a further increase in checking accounts.
Credit risks has remained manageable while profitability has started to improve
Interest rates have declined faster than profit margins during the pandemic, reversing the trend in 2014-19
Unlike past crises, the Covid-19 pandemic has seen strong CASA growth vis-à-vis time deposits
CASA YoY
Time Deposits YoY
Growth YoY %
The growth of e-money (including virtual accounts) has outpaced other transaction channels in recent years
Clearing and RTGS (left) Debet card (left)
Credit card (left) E-money (right)
Transactions volume (index,
CASA have made up a growing portion of third-party funds, but only for the bigger banks
Total BUKU 2
However, the expected recovery in credit volume should not blind us to the uneven terrain that still lies below. While credit growth has started to pick up after ending in Q2-21, this growth has been driven mainly by consumer and working capital loans, while investment loans have lagged behind (Exhibit 7 – top panel). Household savings rates rose at the start of the pandemic but began to decline in Q1-21, so households as a whole are barely a net saver by the end of the year.
An argument in favor of more investment is that industrial capacity had recovered and even approached normal levels before the Delta wave. Now, with global logistics gridlock as well as a demand recovery that has been even stronger post-Delta, it's reasonable to think that CAPEX will start to pick up in 2022. However, recent survey data continues to show a rather modest appetite for investment. in contrast to working capital financing which has only increased since mid-2021 (Exhibit 7–bottom panel).
The extent of business expenditure recovery – and how much of it will depend on bank loans – may also vary across different sectors. As we can see in Appendix 10, most sectors have registered positive growth in 3-21. quarter, but at very different rates. This appears to be related to the strong earnings in these industries, which allows it to meet its financing needs without resorting to banks or the capital market.
In practice, this would likely mean lending to consumer-centric sectors such as retail and real estate, as well as industries that facilitate the economy as a whole, such as telecommunications/IT, logistics and transport. Moreover, there is a case to be made that the domestic growth outlook may be more robust compared to the global growth outlook - at least for 2022. The business cycle in the US, Europe or China may be "longer in the tooth". given their faster vaccination rollout and greater stimulus compared to Indonesia.
Credit risk is more of a lagging indicator, and in the midst of this pandemic it is probably related to the loss of output (compared to potential) that has occurred over the past two years. The lagged nature of credit risk also means that LR resolution will take on greater importance in 2022, particularly as we approach the end of the restructuring relaxation period on 23 March. While LaR is starting to decline (Exhibit 12), Covid-related restructuring still accounts for more than 10% of banks' loan portfolios, and some of it would turn out to be unsalvageable and eventually have to be moved to the NPL bucket -ve or to be written. turned off.
Loans for investment purpose still lag behind working capital and consumer loans
BI Survey : What is the purpose of your financing?
The private sector has maintained large net savings, while those of SOEs and individuals have declined
Individuals Private inst
Financial inst
SOEs
Government Total
Saving - Investment Gap (YoY)
Retained earnings remained by far the most preferred source of financing amid the recovery …
Q : What is your main source of financing?
Loan at risk levels remain elevated, albeit starting to decline thanks to writeoffs or shift into NPL
LAR (%) - only from top 12 national banks
NPL (%)
Special mention (%)
Banks, particularly bigger ones (BUKU 4), have increased their loan loss provisioning
In the first two chapters, we have discussed how funding from CASA (rather than term deposits) can be a critical factor for banks in a rising rate environment, while provisioning is key to mitigating the still raised of LR. The advent of digital channels may at first seem like a leveling of the playing fields, but the sheer amount of CAPEX required, as well as the rapid pace of technological advancement and obsolescence, have only tipped the scales. As it is, the main factors that could potentially shake up the banking business in the medium to long term are mainly external, namely (1) the rise of digital banks or neo-banks, (2) the changing regulatory climate, and (3) the growing trend towards crowdfunding. environmentally sustainable.
It's still unclear who will come out on top of this potential shakeup, but a few things are clear in the near term. Second, digital banks – as well as the more adaptive established banks – will probably gain market share in terms of funding, at the expense of the small and medium-sized traditional banks. BI's new regulation, PBI 23/2021, introduced a metric known as the macroprudential inclusive funding ratio (RPIM), which is the ratio of a bank's SME funding to total funding.
The alternative is for non-SME lending to either stagnate or shrink, something that is likely to be unsustainable given the large financing needs of the recovering economy. Banks that have tended to focus on other types of loans will certainly need to increase their provisioning and also invest in greater capabilities to market and analyze SME loans. On the other hand, it could negatively affect some sectors that have been the mainstays of the Indonesian economy, such as coal and CPO.
The pressure on coal is set to be particularly strong in the future, especially as the government has committed to a net-zero emissions target by 2060. This is a major change in direction from the past decade, when the share of coal in Indonesia's energy mix has has greatly increased. Estimating banks' exposure to coal is not an exact science, given the lack of detailed sectoral breakdown of industry lending data.
A broad estimate is between the banks' total loan portfolio, but coal certainly has a wider spillover to other sectors (Appendix 18, Appendix 19). In the end, however, we do not expect a sharp increase in loan-related credit risk in the short term, as the transition will probably take place quite gradually, and its impact is mitigated somewhat by the relatively high energy prices. Overall, while banks face long-term challenges, they still have sufficient room to adapt as well as momentum from the economic recovery.
There has been wide – and probably growing – profit disparity between the bigger and smaller banks
Total
The share of fee based income continue to increase, but it is not everyone’s game
BUKU 3
Meeting the RPIM could mean either faster overall loan growth and/or slower non-SME loan growth.
Fulfilling RPIM could mean either faster overall loan growth and/or slower non-SME loan growth
Non-SME loanSME share %
Total loan
SME loan
Traditionally, credit risk has been higher for SME loans than other loans in general
SME NPL %
Total NPL %NPL ratio %
Estimating the exposure of coal to bank’s portfolio? #1
First level (direct) exposure
Estimating the exposure of coal to bank’s portfolio? #2
Secondary level (derivatives, only top 10) exposure
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