Future may not be so hot for banks: Experts<\/p>\n
Tony Hotland, The Jakarta Post\/Jakarta<\/p>\n
The country's commercial banks have booked strong third quarter
\nprofits, thanks mainly to low cost of funds that allowed them to
\nenjoy fat net interest margins.<\/p>\n
But analysts warned that as pressure on the central bank to
\nincrease interest rates intensifies, banks may no longer enjoy
\nthis kind of good fortune next year without working hard to
\nrevive lending to the corporate sector.<\/p>\n
\"I think this kind of profit growth will not be sustainable,\"
\nsaid banking analyst Fendi Susiyanto.<\/p>\n
He said that current economic developments, such as rising oil
\nprices, rising interest rates in the U.S. and elsewhere, and
\ninflationary pressures at home, indicated that Bank Indonesia
\nwould likely increase interest rates, a move that would increase
\nthe interest expenses paid by banks to depositors, and eat into
\ntheir profit margins.<\/p>\n
He said that this would erode the profits of banks if they
\ncontinued to solely depend on lower cost of funds.<\/p>\n
The strong third quarter profits earned by publicly listed
\nbanks, in some cases reporting a doubling of profits compared to
\nthe same period last year, was not caused by hard work on the
\npart of the highly paid bankers, but rather the effects of the
\naggressive cutting of central bank benchmark interest rates,
\nwhich in May fell to a record low of 7.32 percent compared to
\nover 13 percent in 2003.<\/p>\n
The lower benchmark rates forced interest rates on time
\ndeposits and savings to fall as well, but interest rates on loans
\nremain high as the banks are still reluctant to channel their
\nexcess funds to the corporate sector due to lingering risks as
\nreflected in a relatively low loan to deposit ratio (LDR) of
\naround 50 percent, compared to 80 percent prior to the late 1997
\nfinancial crisis. This situation had allowed banks to enjoy net
\ninterest margins (NIM) of as high as 8.5 percent.<\/p>\n
\"The current (interest rate) spread is still too wide (about
\n8.5 percent), and should be narrowed to at least 4 percent,\" said
\nFendi.<\/p>\n
Seconding Fendi, economist Faisal Basri said the situation
\nhere was different from neighboring countries such as Malaysia,
\nThailand, the Philippines and Korea, where NIMs were below 5
\npercent.<\/p>\n
Ideally, banks should be charging much lower interest rates on
\nloans than they are doing now, and could still make good profits
\nthough increased lending activity.<\/p>\n
Fendi, however, said that major banks would not immediately
\npump up their lending rates even if the Bank Indonesia benchmark
\ninterest rate started to climb as these banks had better sources
\nof funding compared to smaller ones.<\/p>\n
\"Only around 15 large banks control up to 70 percent of our
\nbanking industry. They won't have critical problems in offsetting
\nlosses in NIMs unlike dozens of smaller banks, and possibly won't
\nraise lending rates, at least as long as the SBI rate remains
\nbelow 8.5 percent,\" said Fendi, referring to the interest rate on
\nBank Indonesia SBI promissory notes.<\/p>\n
Given these considerations, one of the biggest challenges
\nahead will be how to preserve profit levels, whether or not the
\nSBI rate moves up, based on more sustainable sources.<\/p>\n
\"Banks can maintain profits by accelerating lending and
\nmaximizing their fee-based income, which is even more essential
\nin improving their profitability. For example, by being an
\ninvestment advisor or upgrading their service sector. Banks need
\nto increase the contribution of fee-based income to profits from
\nthe current average of 7 percent to about 16 percent,\" Fendi
\nsaid.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/future-may-not-be-so-hot-for-banks-experts-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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