Ailing banking industry off the critical list
Ailing banking industry off the critical list
By Reiner S.
JAKARTA (JP): The financial condition of domestic banks has
improved after the government completed its costly bank
recapitalization program, but experts warn that the industry is
not out of the woods yet as their internal condition is still
weak and external factors can still become a danger.
According to Bank Indonesia, combined operational profits
jumped to Rp 3.6 trillion (about US$387 million at the current
rate) in the third quarter of this year, compared to Rp 8.1
trillion and Rp 500 billion respectively in losses in the
previous two quarters.
The central bank said that the return to profitability was due
to the increase in the net interest margin from Rp 4.8 trillion
in the second quarter to Rp 6.3 trillion in the third quarter.
But banking experts say that external factors particularly the
current weakening of the exchange rate of the rupiah against the
U.S. dollar, and rising interest rates could spell trouble for
the banks.
The weakening of the local currency would lead to rising
domestic interest rates, both of which would create difficulties
in the restructuring of non-performing loans (NPLs). The failure
to resolve the huge NPLs would also then threaten the capital
soundness of the banks as measured by the capital adequacy ratio
(CAR).
Director for banking supervision at Bank Indonesia Djoko
Sarwono said that the top agenda for domestic banks in 2001 is to
achieve the minimum 8 percent CAR level and maximum 5 percent NPL
level by the end of the year.
Djoko said that the central bank had conducted a "stress test"
to measure how the banks would perform particularly in relation
to achieving the CAR and NPL requirements when the rupiah weakens
and the interest rate increases.
"Based on the stress test, some banks must improve their
performance and operation to be able to meet the minimum 8
percent CAR requirement," Djoko said.
"We'll no longer bailout banks through another
recapitalization program," he added, pointing out that banks
which fail to meet the new CAR requirement would be put under the
special surveillance for up to six months and if they still could
not improve the CAR, the banks would be liquidated.
"The biggest challenge for the recapitalized banks is the
weakening rupiah and the rising interest rates," said head of
bank restructuring unit at the Indonesian Bank Restructuring
Agency (IBRA) Soebowo Musa.
The government completed the bank recapitalization program in
October by issuing more than Rp 430 trillion in bonds to help
finance the program. Some Rp 283 trillion worth of bonds have
been injected into the country's four state-owned banks, Rp 124.1
trillion to four nationalized banks, Rp 22.1 trillion to seven
private banks, and Rp 1.2 trillion to 12 small provincial
development banks.
The recapitalization program has brought the banks CAR level
to above the minimum 4 percent requirement.
Djoko said that the CAR condition of the country's
recapitalized banks varies from one bank to another, with some
already above 8 percent while others were still below the 8
percent level but above 4 percent.
He declined to name the banks with the lower CAR level.
In addition to the group of recapitalized banks, there is
another group of around 75 private banks which did not join the
government recapitalization program because their CAR at the time
the program was launched last year was already beyond the 4
percent level. But as the banking environment continues to
remain uncertain, the CAR of this smaller group of banks may
deteriorate and they may have to merge with the stronger banks to
avoid closure at the end of 2001.
Difficult situation
As part of the recapitalization program, banks must clean up
their balance sheets by transferring their bad debts to IBRA.
Only loans below the bad debt category, which may still be non-
performing, remain at the banks.
According to Bank Indonesia, as of end of September this year,
around Rp 54.1 trillion of NPLs owed by nearly 17,000 debtors had
been restructured.
It said that in the third quarter of this year, the NPL level
of the banking sector had declined to 27.9 percent from 30
percent in the second quarter and 32.1 percent in the first
quarter.
"According to my calculations, the NPL level in the banking
sector is still around 34 percent, but even at 27 percent, the
NPL level is still quite high," said banking analyst Elvyn
Masassya.
"The weakening of the rupiah and higher interest rates will
put the borrowers and bankers in a difficult position to reach a
restructuring deal," Elvyn added.
The rupiah has weakened to around Rp 9,500 per U.S. dollar
recently, which is more than a 25 percent drop from the level
earlier in the year due to a combination of domestic political
instability and the weakening of the other currencies in the
region. The government had initially targeted an average
exchange rate level of Rp 7,000 per dollar for this year, but so
far the actual average level was at around Rp 8,500.
The lower exchange rate level and inflationary pressure has
prompted the central bank to allow interest rates to further
increase. The interest rate of Bank Indonesia one-month SBI
promissory notes has been hovering at more than 14 percent
compared to the government target of around 12 percent.
In addition to the high external risk, analysts also warned
that domestic banks are still operating at a very low earning
growth.
Analysts pointed out that around 70 percent of the banks
assets were in the form of government bonds which carry both
fixed and variable interest rates. They said that such an asset
structure was not healthy because a banks earnings should
normally comes from its lending operations.
"Although Bank Indonesia said that banks have returned to
profitability, they're actually still running at a loss if you
consider their financial intermediary operation," Elvyn said.
"The profit so far has only come from the interest rates of
the government bonds they hold. So the improvement is only
artificial," he added.
Indeed, new bank lending to the real sector has been
relatively low. Out of the total third party funds of Rp 652
trillion raised as per end of September, outstanding credit was
only Rp 280.6 trillion.
Bank Indonesia said that new lending only started in July, and
until end of September, total new lending only reached Rp 15.1
trillion, mostly channeled to the industrial and trade sector.
"With such conditions, we can't say we're happy with the
banking performance in 2000," Elvyn said.
Analysts have said that the relatively high risk associated
with the real sector due to the huge NPLs was one factor
discouraging banks from resuming lending particularly as banks
have to meet the minimum requirement of 8 percent CAR by the end
of 2001.
"Banks have now to be extra careful in channeling loans
because the environment is still not yet conducive particularly
with the high NPL level," said chairwoman of the national private
banks association (Perbanas) Gunarni Soeworo, adding that it was
difficult for banks with a minimum CAR level to expand their
lending.
"It's also difficult to find good customers out there," she
added.
The government and Bank Indonesia have recently allowed 14
banks to exchange their fixed rate bank recapitalization bonds
with new government bonds carrying a higher fixed coupon rate to
attract investors to purchase the bonds so that the banks can
raise cash for financing lending activity.
IBRA banks
The group of banks which are currently under the most scrutiny
are the 11 recapitalized banks under IBRA which include the
publicly listed Bank Central Asia (BCA), Bank Niaga, Bank
Danamon, Bank Bali, Bank Lippo, Bank Internasional Indonesia
(BII), Bank Universal, and non-listed Bank Artha Media, Bank
Prima Express, Bank Bukopin and Bank Patriot.
The first four banks are the so-called nationalized banks in
which the government via IBRA owns up to more than a 90 percent
stake in the bank, while the government only owns between 50-80
percent in the remaining group of banks.
The CAR condition of the IBRA banks also varies, with BCA
recording the highest CAR level of around 44 percent.
According to IBRA's Soebowo, BII and Bank Universal had to
work harder to meet the 8 percent CAR requirement by the end of
2001.
In terms of NPL, BCA also has the lowest level, while Bank
Niaga has the highest level of around 72 percent. "The debt
restructuring process has been moving slowly. The NPL level is
still at an average of 30-40 percent which is still very high
according to international standards," Soebowo said.
"We can say that our bank restructuring program is not
complete yet. We have just started by strengthening the capital
condition, but we haven't moved into the core restructuring
program," he added.
In terms of loan to deposit ratio (LDR) -- which reflects the
aggressiveness in channeling loans -- BCA has the lowest level of
5-6 percent compared to its massive deposit base of more than Rp
100 trillion. BII has an LDR of 57.36 percent and Niaga around
45.24 percent.
Soebowo feared that some domestic banks including those
outside IBRA might not be able to meet the new CAR requirement by
the end of next year.
He suggested that the weaker banks with a low CAR be merged
with the stronger banks with a higher CAR level. He said that
once the banks merged, the resulting bigger bank could be sold to
investors to improve its capital condition and financial
soundness.
IBRA divestment
IBRA is planning to divest its remaining ownership in BCA and
Bank Niaga in the first quarter of this year. The divestment
program was supposed to be implemented at the end of 2000 but has
been delayed due to unfavorable market conditions. The agency
sold 22.5 percent of its ownership in BCA through an initial
public offering in May this year.
Another major bank sale planned next year would be the
privatization of state-owned giant Bank Mandiri sometime in the
fourth quarter of 2001.
Other agenda
Another important agenda for the government and Bank Indonesia
next year is to complete the necessary preparations to create a
new agency that would supervise the country's banking industry
and other financial operations excluding the stock market.
But Bank Indonesia's Djoko said that the finance ministry,
which represents the government, has so far not yet held any high
level talks with the central bank over the plans.
"The talks so far are at the working committee level," he
said.
The finance ministry and the central bank have been occupied
this year in trying to resolve the dispute over the government's
massive bank emergency loans channeled via Bank Indonesia to
ailing banks between late 1997 and early 1999 during the height
of the country's financial crisis.
According to the Supreme Audit Agency (BPK) around Rp 80
trillion of the Rp 144.5 trillion loan had been misused by the
recipient banks and this was particularly due to the weak
supervision of the central bank. Bank Indonesia finally agreed
last month to be responsible for financing Rp 24.5 trillion of
the emergency loan.
Djoko also said that the transfer of the supervisory role from
the independent central bank to the new agency was not related to
the weaknesses in Bank Indonesia's supervisory role.
"The transfer is a global trend, it is not because our
supervision has been weak," he said.
The country's banking authority must also immediately complete
the map for the country's new banking landscape. Since the
financial and banking crisis hit the country in the middle of
1997, the government has closed down around 67 out of more than
200 banks.
There are currently more than 150 banks operating in the
country's still crowded banking industry, which comprises 88
private banks (including nationalized banks), four state-owned
banks, 39 foreign and joint venture banks and 26 provincial
development banks.
The remaining number of banks is still huge. "We don't need
so many banks, but what we need is an extensive network of
branches that can efficiently cater to customers throughout the
country," Elvyn said.
But the government and Bank Indonesia seem to have a different
view on what the new banking landscape would be.
The government has said that it wanted to see only a number of
core banks and some smaller focus banks by 2005. But Bank
Indonesia has said that it wants to see a few huge domestic banks
that can penetrate regional and international markets, and a
number of banks that focus on the national market, and yet
another group of banks that focus on rural areas.
There seems to be also no consensus on how the new banking
landscape would be achieved. Some experts have said that banks
must be forced into a merger process, but finance minister
Prijadi Prapotosuhardjo has said that the merger process must be
based on market forces.
Another crucial agenda for Bank Indonesia next year is the
plan to gradually introduce the banking supervision system from
the current compliance-based mechanism to the risk-based system.
Djoko said that the new measure would strengthen the country's
banking supervision system.
"This is a change in paradigm," he said, pointing out that in
the compliance based-system banks must meet Bank Indonesia's
prudential requirements such as legal lending limit, net open
position and minimum reserves requirement.
He said that in the new risk-based supervision system, banks
would be forced to also calculate and manage the risk they were
facing including the credit risk, and market risk.
But Djoko said that the compliance-based system would not be
abandoned although the central bank had implemented the risk-
based supervision system.
"Banks must still meet Bank Indonesia's prudential
requirements," he said.