FOCUS: INDONESIAN BANKS STRONG ENOUGH TO WEATHER POSSIBLE CRISIS

INDONESIAN COMMERCIAL NEWSLETTER

June 2008

FOCUS:

INDONESIAN BANKS STRONG ENOUGH TO WEATHER POSSIBLE CRISIS

The impact of the oil price hikes began to weigh on the country's banking industry. After strong recovery from near collapse in the wake of the 1997/1998 crisis, marked with steady increase in profit, sluggish performance with lower profit was recorded in the first quarter of 2008.

In the past three years the banking industry recorded a leapfrogging increase in profit from Rp33.9 trillion in 2005 to Rp40.6 trillion in 2006 and to Rp49.9 trillion in 2007 or an annual growth of 21% on the average.

In the first four months of 2008, the profit of the country's banking industry reached only Rp16.6 trillion or a slight increase of only 0.4% from Rp16.5 trillion in the same period last year. With that rate, the profit in 2008 could not be expected to go far beyond the level recorded in 2007.

A surge in inflation rate has forced Bank Indonesia to raise its benchmark interest rate (BI rate) lately. The central bank raised the reference interest rate by 25 basis points in two consecutive months from 8% to 8.25% in May and to 8.5% in June.

The increase was a reversal of previous policy of the central bank which steadily cut the interest rate since early 2007. The central bank tried to be careful not to raise the interest rate but strong inflationary pressure forced it to bow to market demand and to prevent outflows of foreign capital.

In the first four months of 2008, operating cost of banks reached Rp 70 trillion, up 11% from Rp62.7 trillion in the same period last year. The operating cost has increased even before the government raised the prices of subsidized oil fuels (BBM) early June. The impact of the fuel price hikes is feared to continue until the end of this year. A more sluggish growth is predicted for banking profit. A surge in the oil prices to as high as $142 per barrel late June and high inflation will force banks to be more careful in extending credits.

Larger provision for non performing credits in the prospects of gloomier economic outlook also contributed to the increase in operating costs of banks.

Prices of bank shares down

After the 25 basis point increase in the BI rate to 8.5%, the market sentiment was negative especially in bank share market. Market players generally said the possibility of BI rate to go up further is strong. The fear was reflected in the movements of the Jakarta composite share price index (IHSG)

The price of PT Bank Rakyat Indonesia Tbk (BBRI) in June 2 -13 fell Rp800 (13.45%) from Rp 5,950 to Rp 5,150 per share. The price of the country's second largest lender in asset was higher than other major banks in the country.

In the same period, the price of PT Bank Danamon Tbk (BDMN) fell 8.18% from Rp5,500 to Rp5,050, PT Bank Central Asia Tbk (BBCA) down 7.14% from Rp2,800 to Rp2,600, PT Bank Mandiri Tbk (BMRI) down 1.75% from Rp2,850 to Rp2,800, PT Bank Negara Indonesia Tbk (BBNI) down 3.23% from Rp1,240 to Rp1,200 , PT Bank Internasional Indonesia Tbk (BNII) down 2.15% from Rp465 to Rp455 and PT Bank Permata Tbk (BNLI) was unchanged from Rp900 per share.

The decline in the prices of BRI and BCA came as a market reaction as the two banks have large investment in state bonds, the prices of which has dived lately. The large investment in the state bonds gave the negative sentiment as the shrinking value of bond is feared to mean a cut down on profit. Many banks, already shifted in investment to Bank Indonesia certificate (SBI).

Bank Indonesia advised commercial banks to continue credit expansion to support development of other sectors, but it called for greater caution against non performing credits.

In the period of June 2-13, three banks posted an increase in share prices on corporate actions. PT Bank Niaga Tbk (BNGA) rose 1.04% from Rp960 to Rp970 per share, PT Bank Lippo Tbk (LPBN) increased 3.74% from Rp2,675 to Rp2,775 and PT Bank Pan Indonesia Tbk (PNBN) shot up 50.77% from Rp650 to Rp980 per share.

Some stock market observers said the falling price of bank stocks was caused more by apprehensive uneasiness of investors seeing the continued rise in the oil prices that has triggered a surge in inflation and weakened the real sector.

More sluggish but will survive difficult period: Bank Indonesia

A number of banks have shown a decline in performance, but in general the condition of the banking industry is still good, Bank Indonesia said. The result of stress test by the central bank in the first quarter of this year was positive.

Senior Deputy Governor of Bank Indonesia Miranda S Goeltom said after chairing a meeting of the central bank board of governors (6/5/2008), the test of the resilience of banks showed that the condition of Indonesian banks was strong enough to resist possible crisis. Miranda pointed to progress made to reduce non performing loan (NPL) rate from 4.78% to 4.33% gross and from 2.1% to 1.78% net.

The amount of third party funds held by banks is relatively stable though declining slightly to Rp1,466.2 trillion resulting in an increase in loan to deposit ratio (LDR) to 73.7%.

Banks were more active in assuming their intermediacy function as reflected by the increase of Rp34.2 trillion in total outstanding credits to Rp1,080.1 trillion March, 2008. Bank capital adequacy ratio was still higher than he minimum limit set by Basel II.

Banks in Asia including Indonesia have so far succeeded in weathering the global crisis such as the U.S. housing credit crisis although growth is predicted to be slower or flat this year.