Salient to Investors:

Indonesian lenders are the most profitable among the 20 biggest economies with average return on equity is 23 percent for the country’s five biggest banks, versus 21 percent for Chinese banks of the same size, 20 percent for Canadian banks, and 9 percent for US banks.

Indonesian banks are among the most inefficient, as measured by the ratio of operating expenses to total assets. Net interest margins average margin is 7 percentage points, the highest of the 20 economies, and versus 2 percent in Singapore.

Ken Timsit at Boston Consulting said:

  • Demand for credit is plenty but supply limited.
  • The ratio of operating expenses to assets ranges from 2.5 percent to 4 percent at Indonesia’s biggest lenders, versus 2 percent in Malaysia and 1 percent in Singapore.
  • Everyone remembers the Asian financial crisis in 1998, so banks are very conscious of the importance of being prudent.
  • A scarcity of data about borrowers’ creditworthiness and relatively high interest rates contribute to low loan penetration.
  • To reduce the net interest margins requires better bank infrastructure, better customer data, better creditor data and better identification, rather than pressure from the regulator. When margins start falling, fee income from other activities should pick up and contribute to profits.

Tigor Siahaan at Citigroup expects non-interest income to increase as companies stop treating banks just as loan houses.

Alexander Chia at RHB Capital said the higher expenses are largely a function of Indonesia’s geography: 17,508 islands, 6,000 inhabited, more than 2/3 of the 242 million people living in rural areas.

Robby Hafil at PT Trimegah Securities said Indonesian bank efficiency is still lacking compared with other countries – banks cover operational costs by increasing net interest margin.

Indonesian inflation has averaged 7.3 percent in the past 10 years. Indonesia’s benchmark interest rate is 5.75 percent is lower only than Russia’s 8.25 percent, India’s 7.75 percent, Brazil’s 7.25 percent, and China’s 6 percent.

Isfhan Helmy at PT Sucorinvest Central Gani said consumers feel the interest rates are low given that the benchmark rate is at a record low.

Fitch Ratings said non-performing loans, at record lows of 2 percent, may rise in 2013 due to the rapid rise in lending. report. Fitch said Indonesian banks will sustain profitability because they’re making adequate loss provisions, while central bank measures such as lowering benchmark rates and encouraging more competition will push down interest margins.

Stephan Hasjim at Nomura said outstanding loans at Indonesian lenders totaled 30 percent of 2011 GDP, the lowest ratio among major Asian markets. Bloomberg say the ratio was 150 percent in Singapore and 125 percent in and Malaysia based on 2011 GDP. Hasjim says competition will lower the very high margins but it may take many years.

OECD expects Indonesian GDP growth to average 6.4 percent from 2013 to 2017.

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