Muhamad Al Azhari – Indonesian commercial banks posted healthy 26.74 percent growth in net profit last year, central bank data showed Monday. Analysts and industry players credited the performance to low interest rates and economic expansion.
This year, despite inflationary pressures that are expected to trigger further central bank rate hikes, lenders are bullish on profit expectations, in line with growth in loan portfolios.
Data from Bank Indonesia, the central bank, showed net banking profits were a combined Rp 57.1 trillion last year, up from Rp 45.2 trillion in 2009. The central bank's data was unaudited and net profit was calculated after tax reductions.
"I believe nation-wide commercial banks will keep on making healthy profits this year. Yes, it is true we are being haunted by inflation and a BI rate hike. When the rate increases, banks' cost of funds also increases. But I believe profits will keep rising in line with loans," said Kostaman Thayib, director of Bank Mega.
Despite lenders likely increasing their borrowing rates, Kostaman said that does not mean the loan volume must shrink. "The economy is growing at a healthy pace. From the risk premium side, we don't see signs that it is going to get worst. If the private sector and consumer spending are stimulated, loans keep on growing," he said.
Risk premium is the cost that banks charge for borrowers according to their risk. Indonesia's economy grew at 6.1 percent last year, compared to 4.5 percent in 2009. This year, the central bank expects 6 percent to 6.5 percent growth. This should keep risk premium in check for corporations, small to medium enterprises and retail consumers.
Bank Indonesia's data, however, showed the banking sector overall having difficulty pushing down operational expenses, which rose to Rp 302.55 trillion at the end of 2010 from Rp 258.31 trillion in 2009. Operating expenses include general and administrative expenses, personnel expenses and office maintenance expenses.
Total outstanding bank loans reached Rp 1,742.85 trillion by the end of 2010, rising 23.8 percent from the year before. The central bank expects lending to grow by 21 percent to 23 percent again this year, with a potential downside of 19 percent if inflation soars.
Darmin Nasution, the central bank's governor, said last month that bank lending accounted for 26.1 percent of Indonesian GDP in 2010, almost unchanged from 25.7 percent in 2009. This year, he said, banks still have room to grow in the small and medium companies market, a segment where lenders are keen to seek higher loan margins.
Joseph Pangaribuan, an analyst at brokerage Samuel Sekuritas Indonesia noted that in 2010 lenders enjoyed low cost of funds due to the BI rate being at an historic low, a major factor driving profits higher. Samuel Sekuritas predicts the BI rate could go up to 7 percent, a tolerable level for bank profits. "We are not too worried that this sector would see serious trouble from inflation and higher interest rates," he said.
In 2008, banking sector profit fell by 12.59 percent due to the global financial crisis. Profit rebounded fast in 2009. Joseph added that an agreement made in November 2009 by the country's 14 biggest lenders to lower the time-deposit rates offered to large institutional depositors also helped banks keep their cost of funds low.
The key BI rate has been gradually lowered from a record high of 12.75 percent in April 2006 to 6.5 percent in August 2009. It stayed there through 2010, before it was raised to 6.75 percent in February due to inflation pressures and after all other central banks in Asia had raised rates
Indonesia's largest bank by assets, Bank Mandiri, posted Rp 8.8 trillion in net profit last year, up 23.6 percent from 2009. Bank Danamon, the No. 6 bank in the country, recorded Rp 2.88 trilion in net profit in 2010, a jump of 88 percent from 2009. Bank Danamon had significant exposure to derivative transactions, which fell apart during the 2008 crisis.