The recent bomb attacks in Jakarta certainly did not dampen the optimism of bankers and industry observers in the Indonesian banking sector. In fact, industry players remain enthusiastic about the prospects of the banking industry there.

“The potential of the Indonesian banking industry is very significant. This is riding on a few factors, which include the huge population as well as the improved political stability. If the middle class in Indonesia comes up to 10% of the population, the number is bigger than the entire Malaysian population,” deputy CEO and treasurer of CIMB Group, Lee Kok Kwan, tells The Edge.

Indonesia is the world’s fourth most populous country after China, India and the US and the Indonesian economy has been growing so fast that some believe it will soon join the ranks of emerging giants Brazil, Russia, India and China or BRIC.

In addition, Indonesia’s gross domestic product (GDP) is expected to be among the fastest growing in the region this year despite the tougher global economic climate. In 1Q2009, the country’s  economy achieved one of the highest rates of growth in Southeast Asia, buoyed by domestic spending.

The country’s GDP expanded 4.4% y-o-y in the three months to March 31, while its neighbouring countries saw contractions. For 1Q2009, Singapore’s economy shrank by 10.1% while that of Malaysia and Thailand retreated by 6.2% and 7.1% respectively.

“Indonesia has been less affected by the global crisis than its neighbors as its domestic market forms a large component of its economy. About 70% of its economy is domestically driven. It isn’t as reliant on exports as other Asian nations. Going forward, the GDP will likely be the strongest in the region for this year. Its stock market is up 70% YTD and its currency has strengthened significantly,” says Lee.

He adds that the country is politically stable now and the focus is likely to be on infrastructure. “As such, the prospects for the banking segment there are bright,” says Lee.

“We are very bullish on Indonesia. Margins have widened quite a bit for the banking segment there — up to more than two times the margins in Malaysia. The growth potential is quite high, considering the market is quite under-penetrated. Our Indonesian unit — CIMB Niaga — has been fully integrated into our group’s accounts this year and the earnings from there are growing strong.

The NIM (net interest margin) has expanded about 20% y-o-y from the start of the year till now,” he explains.

The average income yield — a measure of operational profitability — for Indonesian banks in 2008 stood at about 7.5%, which is more than double the average yields of Malaysian and Singapore banks of 3.6% and 2.6% respectively.

According to Vincent Khoo, Malaysia’s UOB-KayHian’s head of research, the average return on equity (ROE) for Indonesian banks is the highest among  banks in Southeast Asia under the foreign research house’s coverage.

“The simple average ROE for Indonesian banks that we cover is about 18.9%. Recently, our Indonesian research team upgraded the country’s banking sector from ‘market weight’ to ‘overweight’ as the macro backdrop appears to be favourable, driven by lower interest rates and, in turn, a pick-up in lending. The absence of funding pressure should also lead to stronger margins,” says Khoo.

“Indonesian banks enjoy a strong capital base with Tier-I capital adequacy ratio (CAR) of 13.7%. The banks, however, saw an increase in non-performing loans (NPL) in their 1Q2009 numbers, but we think the spike is still manageable. The increase was particularly seen in corporate and SME loans while consumer segment NPLs remained relatively unchanged,” he adds.

Indeed, the Indonesian banking segment is attractive. Two of the largest banks in Malaysia — Maybank and CIMB Group — already have a strong presence there through their Indonesian bank subsidiaries.

For FY2008 ended Dec 31, CIMB Group’s Indonesian business contributed 19.5% to its net interest income of RM4.7 billion and 16% to its total assets of RM203.7 billion. The banking group’s 2008 results only included two months of ex-Bank Lippo financials following the merger of PT Bank Niaga and PT Bank Lippo in November 2008.

Last year, Maybank also jumped onto the Indonesian bandwagon when it acquired Bank Internasional Indonesia (BII).

In March last year, Maybank’s then acting CEO Datuk Aminuddin Md Desa told reporters the proposed purchase would increase Maybank’s overseas revenue contribution from 19% to 28% in two years and that it would boost profits a year later. Besides having control over an Indonesian bank, Maybank would be in a position to increase its gross loans from 20% to 30% after the purchase, he added.

The banking group’s net interest income for the nine months ended March 31, 2009, increased by RM280.1 million or 6.9% to RM4.3 billion over that of the corresponding period. Maybank noted that the higher net interest income came mainly from growth in loans, advances and financing, and improved lending margins, as a result of the consolidation of PT Bank Internasional Indonesia Tbk results, a 97.5% subsidiary.

Recently, it was reported that Malaysia’s fourth largest bank — RHB Capital Bhd — was also eyeing the Indonesian banking segment. In a research report last Thursday, Maybank Investment Bank  Research noted that the group’s internationalisation agenda would be stepped up, with the new key target market being Indonesia and “a new presence in Indonesia is a priority”.

Top officials of local banks here are looking at the Indonesian operations overtaking the Malaysian market a few years down the road. Increasingly, that is becoming a reality.




This article appeared in Corporate page of The Edge Malaysia, Issue 767, Aug 10-16, 2009.