Wednesday, 15 January 2014


Economic slowdown would still haunt performance of the banking industry in 2014. Growth of the banking industry in 2014 was projected to slowdown. Next year challenges of the banking industry was heavy as liquidity would be tight while the risk of NPL tend to increase.

Bank Indonesia estimated growth of bank’s credit next year would only be around 15.3%- 16.6%. The figure was way below credit growth estimate 2013 at around 20.8%

BI saw that the effort to stabilize economy which was predicted to continue through 2014 accounted for lowered credit growth percentage. Slowdown in credit pipelining was also triggered by increase of bank’s credit. Instead of being aggressive banks would be conservative and tend to be moderate. Most banks chooses to put brakes on credit growth target according to BI’s projection.

Take for example Bank Mandiri who adjusted their credit growth percentage to around 15%-17%. The same step was taken by BCA who sets target of credit growth at around 15%.

The reason was that credit of the consumer sector and automotive credit would stagnate next year due to LTV regulation released by BI. Beside credit slowdown, banks would also have to face three great challenges next year.

The first challenge was related to liquidity problem which was getting tighter. Many funds from institutional customers exit from the banking system as they were used for buying State Promissory Notes [SUN] to jack up yields. All in all liquidity was getting third party fund was getting just as tight.

Liquidity for the next year was tight as the Fed would execute their Tappering Off. All in all, hard cash would flow back overseas. Liquidity tightening was already visible from growth of Third Party Fund [DPK] which slowed down in the past 2 years. To illustrate, in 2011 collection of DPK was still growing by 19%. Last year DPK only rose by 15%. The risk of liquidity dryness increased since BI increased BI rate in june 23 last.

Deposit Insurance Agency [LPS] estimated, growth of DPK next year would only increase by 14.1%. Therefore interest war was predicted to still continue for the next 3 years. Banks would compete to offer fixed deposit interest as high as they could to hook customers.

The Financial Service Authority [OJK] also admitted that bank’s liquidity would appear as potential problem next year. It was feared that by the time economic condition turn worse, banks would be reserved in extending credit in inter bank [PUAB] market. To anticipate such problem BI was asking banks to tans-act in non PUAB moneymarket.

BI also initiated mini Master Repurchase Market Agreement [MRA] which involved 8 banks. The project was expected to activate inter-bank repo transaction so bank’s liquidity could be made more soluble. However banks must prepare alternative strategy like issuing bonds to ensure liquidity in 2014.

The Second Challenge which was not less heavy was increasing risk of non-performing-loan [NPL] due to increased credit interest and lessened people’s purchasing power. BI estimated that by next year NPL could come to 2.8%-3.1%. As per October 2013, NPL in the banking sector was still at 1.9% At this point BI asked banks to increase provision cost to anticipate NPL.

Slowdown of economic activities was in line with BI’s or Government’s guidelines was feared to burden the businessworld which had the potential to increase NPL.

The Third Challenge to be faced by banks was to strengthen banks capital. Banks must strive to increase Capital Adequacy Ratio [CAR] to strengthen capital asset when economy turned weak. Bank’s circles admitted that the potential of NPL next year was not big. So next year banks were advised to be prudent in pipelining credit.

With sufficient capital strengthening in accordance with Basel III stipulation, the 8% car was no longer sufficient. What was rated as sufficient was when banks had CAR according to BI’ s new policy, whereby to anticipate the impact of crisis cycle and after effects. In this case, one of the efforts to increase capital was by reducing dividend portion to shareholders to be transferred to bank’s account for capital strengthening.

So instead of receiving dividend in high amount, by next year shareholders of the banking sector had to stare blankly as the provit being distributed would be less. Most probably they had to pay from their own pocket to strengthen the banking capital.

As known, BI had again made adjustments in the obligation to provide minimum capital [KPMM] of bank through Bank Indonesia Regulation [PBI] no.15/12/PBI/2013. The policy which was signed on December 12 last was designed to strengthen bank’s capital in terms of quality and quantity which was adjusted to international quality standard, Basel III. The point was that as per January 1, 2014 all the banks were obliged to comply to this regulation.

Just like the previous regulation, banks were obliged to fulfill KPPM 8%-14% from measured as set according to ATMR risk depending on the risk profile of each respective bank. The only thing was that by this new regulation, banks were obliged to collect extra capital as buffer, conversation buffer and capital surcharge.

Capital Conversation Buffer was a buffer capital being prepared in times of crisis. This additional capital was only for public banks based on business line BUKU 3 and BUKU 4. Meanwhile capital surcharge was only applicable to banks of systemic impact.

Country Clinical Buffer was additional capital for all banks designed to anticipate loss in case of over growing credit, which had the potential to shatter financial system stability. The 3 types of additional capital was effective per January 1, 2016 and gradually exercised to keep bank’s capital working.

Beside quantity, BI also obliged banks to increase quality of capital through change of components and requirements for capital instruments according to Bassel III. By this new policy, capital components consisted of core capital [tier 1]  and complementary capital [tier 2]. The core capital consisted of core capital and additional core capital. BI obliged banks to provide core capital at least 6%. Previously mandatory core capital was only 5% of ATMR. Besides, banks were also obliged to provide main core capital at least 4.5% of ATMR, individually or by consolidation with subsidiary company.

By this regulation, shareholders must be willing to inject extra capital. If the could not afford to do so, merger could be an option. The new capital regulation for banks which was effective per January 2014 forced banks to strengthen their capital. If they did not wish their capital to be eroded, banks must reduce credit growth. If they were unable to inject more capital, bank management must increase their profit to keep their capital remain strong.

An example was Bank Mandiri who choosed to strengthen capital through profit held from profit income through 2013. Today,CAR of Bank Mandiri was at the 15% level. The management of Bank Mandiri was expecting profit growth of 2013 would expand space for transactions of capital placement in other opportunities.

Meanwhile BCA seemed reluctant to reduce dividend for shareholders; they would still be given dividend the same as last year, i.e. around 22%-26% of net profit. BCA would maintain CAR at 15%-16% in 2014 by way of reducing credit pipelining next year around 15%.

BCA’s CAR at the moment was 16%,still within BI’s standard and still sufficient to finance business operations for one year ahead. If credit pipelining grew 15% CAR would still maintained at 16% level. However,if credit grew by 17% bank’s capital would be eroded. Somehow bank would make big profit. BCA only set credit growth between 13%-15% so capital would remain positive.

Meanwhile BRI needed no special strategy as they already had minimum strategic capital still above 15%. Meanwhile BJB Bank Banten manager Bien Subianto responded to Basel III Standard which would erode BJB’CAR. At the moment BJB CAR was at 16%. By this regulation, BJB’s CAR dropped to 12%-14%. In anticipating capital slump, BJB planned to launch rights issue in 2015.

Meanwhile Bank Bukopin had strengthened capital through rights issue worth Rp 1 trillion – Rp 1.7trillion. Yields from rights issue would be booked as core capital, which strengthened CAR to 16%-17% against the previous position of 15%. All the above mentioned had the same objective, i.e. to strengthen capital to be more resistant. Such was the essence of bank’s capital strengthening.

Business News - January 3, 2014

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