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The interest rate cut by Bank Indonesia (BI) last week and further anticipated rate cuts in that country could be a game changer for Malaysian banks in Indonesia as they could see an uplift in their loan growth and earnings amid a challenging economic environment following weaker commodity prices and slower economic growth.
Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd’s units had been bogged down by provisions due to pressure on their asset quality but this scenario is set to change amid signs of further rate cuts by the Indonesian central bank.
Maybank operates in Indonesia via PT Bank Maybank Indonesia Tbk and has about 80% shareholding in Maybank Indonesia Tbk while CIMB Group has 97.94% stake in PT Bank CIMB Niaga Tbk.
CIMB Group chief executive Tengku Datuk Seri Zafrul Aziz, via an e-mail, told StarBiz the move to cut interest rates by BI would see further uplift in CIMB Niaga’s loan growth this year.
“BI is adopting a growth strategy for its 2016 monetary policy. As such, we believe there will be further interest rate cuts this year. We expect CIMB Niaga earnings to improve this year on the back of sustained net interest income, improved non-interest income as well as lower loan provisions,” he said.
He said the group was still positive on the longer-term growth and opportunities in Indonesia and were placing added focus on the consumer and small-medium enterprise (SME) segments in a bid to boost earnings growth.
“With the government’s economic policy packages that aim to boost the economic growth in Indonesia, we are cautiously optimistic of our business growth there.
“On the direction of the gross non-performing loans (NPL) of the industry, it is highly dependent on the macroeconomic shifts from commodity prices, the currency and consumer consumption. For CIMB Niaga, we expect gross NPLs to gradually reduce, going forward, from the high of 2015,” Zafrul added.
For the third quarter ended Sept 30, 2015, CIMB Niaga’s gross NPL ratio improved to 3.17% compared with 3.35% in the same period a year ago as a result of sales of asset to an affiliated company of CIMB Group. Its loan loss coverage during the period increased to 120.96% from 82.89% a year ago.
The group’s Indonesian arm posted a net profit of 442 billion rupiah (RM137.4mil) for the third quarter. Comparatively, it recorded 93 billion rupiah a quarter ago.
The bank kept its position as Indonesia’s fifth largest bank by assets, with total assets standing at 244.29 trillion rupiah, representing a 7.3% increase year-on-year.
Total gross loans rose 7.2% year-on-year to 178.89 trillion rupiah, driven largely by growth in corporate loans, consumer loans and in micro small-medium enterprise banking, while commercial loans remained flat.
BI, on Jan 14, announced a 25-basis-point cut in its benchmark policy rate to 7.25% in a bid to lift an economy growing at its slowest rate in six years.
Zafrul said CIMB Niaga would follow suit with the rate reduction and also make adjustments to its lending interest rate accordingly as the cost of funds would be correspondingly lower.
He said the banking group has also identified a few key priorities for CIMB Niaga this year. These include looking at ways to optimise its SME franchise, further developing its treasury and market capabilities and growing the consumer banking business while focusing efforts to increase CASA (current account/savings account), improve asset quality and continuing with its stringent cost management initiatives.
Additionally, Zafrul said CIMB Niaga would play a more active role as the leading digital bank in Indonesia with the support of a new core banking infrastructure.
Meanwhile, despite weakening asset quality, Maybank Indonesia’s net profit for the nine months ended Sept 30, 2015 increased by 70.7% to 592 billion rupiah (RM187.1mil) from 347 billion rupiah a year ago. Its gross NPL stood at 4.34% in the third quarter from 2.55% last year. The bank posted loans growth of 6.6% to 111.5 trillion rupiah in the nine months from 104.6 trillion rupiah in the same period in 2014.
On the loan growth for CIMB Niaga and Maybank Indonesia as a result of the interest rate cut, Malaysian Rating Corp Bhd head of banking Sharidan Salleh said: “During the nine months of last year, the two banks’ loans grew by about 7% year-on-year. We expect the banks’ loan growth could be higher in 2016 at about 9%-10% in tandem with the expected higher GDP growth at 5.3% in 2016 from 4.73% in 2015.
“The economic growth is expected to be supported by Indonesian government-driven infrastructure projects. However, banks’ profits from Indonesian operations could be pressured by provisions and compressed margin. Given the current challenges in the economy, we expect the asset quality of these banks would remain under pressure in 2016.”
UOB Kay Hian analyst Alexander Margaronis said that based on historical data, significant loan growth in Indonesia might take three quarters to pick up after the first rate hike.
Furthermore, he said the relationship between time-deposit (TD) rate cuts to BI reference rate cut was 1:1 in the short term with no lag time.
“As we expect further BI rate cuts down the road, cost of funds could come down further as time deposit rates decrease. This should keep the industry’s net interest margin relatively stable or even higher.
“In the last major round of rate cuts by the BI (2009-2013), BI reference rates came down by a total of 350 basis points (bps) versus TD rates declining by about 500 bps whereas lending rates came down by about 300 bps,” Margaronis noted.
