ING Baring predicts lower profits for top banks
JAKARTA (JP): Bank Indonesia's tight monetary measure to shore up the rupiah is expected to cut the earnings growth of Indonesia's top publicly listed banks.
ING Baring Securities said in its latest weekly report that the banking system was among the worst hit by the credit crunch measure, which had caused a sharp increase in interest rates.
The report said among the banks severely hit by the crisis were Bank Bali, Bank Danamon, Bank Dagang Nasional Indonesia (BDNI), Bank Internasional Indonesia (BII), Bank Lippo, Bank Negara Indonesia (BNI), Bank Panin and Bank Tiara.
The securities company said it had revised down the net profit projection of those banks by between 20 percent and 60 percent for 1997 and 1998.
ING Baring said its 1997 profit forecast for Bank Bali was, for example, lowered by 24 percent to Rp 120.7 billion from the initial Rp 150.4 billion estimate. It also cut down its 1997 net profit projection for Bank Danamon by 63 percent to Rp 169.3 billion from the initial Rp 277 billion estimate. (see table)
The report said the growth estimate projection was made in anticipation of lower loans growth and deposit rate forecast to an average of 10 percent this year and next year.
"We have assumed a 20-30 basis point drop in the net interest margin because the banks have to compete more actively for deposits," the report said.
The report said the provisioning had been raised by 50 basis points across the board to take into account the probability of higher nonperforming loans because companies were squeezed by tight liquidity and high interest rates and the lower value of the rupiah.
ING Baring said that banking stocks were among the markets worst performers due to the financial crisis.
"There was a feeling, albeit denied by most parties concerned, that many have suffered large losses on their foreign exchange trading activities," ING Baring said.
The securities companies said a higher interest regime, particularly if short-term rates stay as high as 30 percent for any period of time, would lead to a greater incidence of defaults from customers.
"This is particularly true for those with heavy exposure to the property sector which is perceived as being particularly vulnerable," the report said.
The report said a provisioning level of 2 percent of gross loans would not be enough compared to the increasing number of problem loans.
The report said that previous loan growth forecasts of 20 percent had been predicted in expectation of continued economic growth at 7 percent.
However, it said, a sharp increase in interest rates could be expected to dampen sharply the demand for funds such as the loans growth in 1998 and 1999.
The report also said that high interbank rates had led to an increased cost of funds.
The report said that although the banks had sought to compensate by raising their lending rates across the board, it was by no means clear that they would be able to make these rates stick.
But ING Baring said the currency turmoil would only last for three months at the most until the rupiah stabilized.
"Indeed there are signs that some stability has already been reached with the exchange rate settling in the Rp 2,900-2,950 range with deposits starting to fall," the report said.
The rupiah and other Southeast Asian currencies have come under pressure following the devaluation of the Thai baht in July. Rupiah has lost over 20 percent against the U.S. dollar since then. (aly)