Lenders’ Struggle for Funding to Continue: S&P

Funding strains among Indonesian banks is likely to persist this year, undermining the industry’s profitability and growth ahead, according to credit rating agency Standard & Poor’s.

In a report released last Thursday, S&P estimates lending growth in Indonesia to reach between 13 percent and 15 percent in 2015, higher than last year’s pace of 11.4 percent. That level of growth is projected to keep funding costs high, despite the regulatory caps implemented by the Financial Services Authority (OJK) last October.

“Indonesian banks that struggle to attract sufficient deposits will face a tough choice of reining in credit growth or paying the penalty for breaching regulatory liquidity ratios,” said Standard & Poor’s credit analyst Ivan Tan, referring to Bank Indonesia’s mandate that maintained loan-to-deposit ratio (LDR), an indicator for liquidity, at 92 percent.

LDR among commercial banks in Indonesia stood at 88.26 percent in February, an improvement from 90.47 percent in the same period last year, OJK data showed. That lower ratio indicated more money available for lending.

Tan added that tighter competition for funding will eat into banks’ profitability in the next 12 to 18 months, forecasting net interest margin ­— a measure of a bank’s profitability — to reach around 4 percent this year. This would be a 20 basis-point decline from 4.2 percent last year.

Under the current conditions, S&P expects Indonesian lenders will see “a new normal” in lending growth as banks work on preserving their liquidity instead. This could mean slower lending growth, greater efforts to expand branch networks for new sources of funding and regulatory changes for short-term relief. Before 2014, lending growth was above 20 percent for several years.

Tan noted that the impact will likely be “asymmetric,” depending on each bank’s financial performance and operational presence, saying: “Banks with a strong domestic deposit franchises and extensive branch networks should weather the conditions better than peers with less-robust deposit franchises.”