Making the most of BI's new transparency ruling

Making the most of BI's new transparency ruling

Berni K. Moestafa, The Jakarta Post, Jakarta

When reading a bank's financial statement, here is what to
look out for: net profit, capital adequacy ratio (CAR), and asset
growth and quality, or so a number of analysts have said.

Knowing how to read financial reports properly will make more
worthwhile a recent ruling by Bank Indonesia forcing banks to
publicize their financial reports on a monthly basis. The reports
are to be published on the central bank's website at
www.bi.go.id.

As public concerns about bank closures and mergers linger, the
ruling may help customers gauge the health of their investments.

For banks, tighter public scrutiny means improving prudential
management practices or risking the loss of customers.

According to Bank Indonesia, its ruling No 3/22/2001 on the
transparency of banks' financial conditions was effective as of
today.

"The one thing people should look at is the bank's income
statement showing its net profit," said Ahmad Subagja, an
investment analyst with PT Niaga Sekuritas, over the weekend.

Banks derive their income from interest on loans and the fees
they charge for services such as money transfers and bill
payments.

A bank's net profit, Ahmad said, revealed its performance at a
glance, but only if it were compared to its net profit in the
past.

In evaluating a bank's earnings, people should also take note
of the productivity of its assets, that is, the capacity of a
bank's assets to generate income, he added.

One of the factors determining asset quality is the
reliability of interest and principal payments. Hence, non
performing loans (NPL) are those on which interest and principal
payments are 90 days or more overdue.

Loans usually make up the bulk of a bank's assets, although
most Indonesian banks currently own assets in the form of
government bonds since the bailout program following the 1997
financial crisis.

The quality of loans reveals the soundness of a bank's
management. Prudential management reduces the risk of loans
turning bad, and with it the need to raise capital as a provision
against risky loans.

One important tool for measuring a bank's capacity to back up
its loans is called the capital adequacy ratio, or CAR.

CAR measures a bank's capital against its risk-weighted
assets. Capital in this context is largely the money that bank
owners have injected into their banks.

Assets are risk-weighted because loans carry different degrees
of risk depending on the strength of their guarantee.

Government bonds or gold are risk free assets. This is not
true however of loans tied to collateral such as corporate bonds.

Banks must show a CAR level of at least eight percent, meaning
that for every Rp 12.5 in assets they must raise Rp 1 in capital.

The riskier the assets, the more capital is needed to maintain
an adequate CAR level.

With the economy still in the doldrums, banks' CAR levels have
become increasingly important due to Bank Indonesia's policy of
closing banks with an inadequate CAR.

The alternative to this fate is merging with stronger banks.

An investment analyst at Mega Capital Indonesia, Erwin S.
Widjojo, said customers should be aware of banks with marginal
CAR levels of just above eight percent.

As many industries are still reeling from the economic slump,
loans may quickly turn sour and add to pressure on banks' CARs.

To mitigate the risk of falling CAR levels, banks extend their
loans evenly among large and small enterprises.

They reduce their loan exposure to affiliated companies and
refrain from channeling loans to selected business groups only.

Under the legal lending limit ruling, banks must limit their
loan exposure to affiliated parties to no more than 10 percent of
their total capital.

In terms of loan growth, Erwin said a healthy bank should be
able to record a growth rate of some five percent every three
months.

He said new loans meant more income, but cautioned that
expanding too fast ran counter to prudential management
practices, and thus increased the risk of bad loans.

Thus far the demand for new loans has remained low, since many
industries are still operating at production rates below their
pre-crisis levels.

To survive, many banks rely on earnings from government bonds
and fees.

Erwin said that, while a monthly financial report was helpful
in monitoring a bank's progress, the quarterly ones were more
comprehensive.

According to him, it takes about three months before the
impact of various management policies can be seen in a financial
report.