Strong fundamentals: The sector is well positioned to experience sustained growth

Banking remains a highly profitable sector in Indonesia despite being limited in its reach. Leading banks’ average profits were the highest amongst major economies in 2012, according to Bloomberg data, a remarkable feat in an era of falling bank profits globally. Credit and savings remain marginal, however, with loans accounting for 32.85% of GDP and deposits 39.13% by December 2012, according to the central bank, Bank Indonesia (BI). Although lending has grown by an average of 20% annually in the five years to 2013, according to private-equity firm KKR, driven by strong consumer credit growth linked to the emerging middle class, its contribution to the economy remains far shy of neighbours like India (55%), Malaysia (113.5%) and China (130%).

While well-capitalised and conservative, with very low reliance on wholesale funding, Indonesian banks are constrained by slower deposit growth. As the regulator seeks to expand banks’ intermediation to more productive sectors of the real economy, foreign institutions’ appetite to tap into domestic growth has grown significantly in the past five years. Amidst tightening liquidity, banks’ and the regulator’s priorities are changing. “We are now more focused on stability than on growth,” Bimo Epyanto, BI’s assistant director of investor relations, told OBG.

Rapid Expansion

Credit growth recovered quickly from its November 2009 trough – when it slowed to 5.5% year-on-year (y-o-y) amidst the global financial crisis – reaching 24.4% in 2011 and 23.9% in 2012 before moderating slightly to 20.7% in the first half of 2013, according to BI data. Commercial banks’ total assets, meanwhile, grew 17.08% y-o-y to Rp4716.85trn ($471.69bn) by October 2013.

Lending to households was the key driver, especially vehicle and housing loans. Sharia lending (through both dedicated banks and conventional banks’ windows) has also grown at consistently above-market rates in the three years to 2013, sustaining 24% annual asset growth compared to 11% for conventional bank, according to PwC. “Islamic banking is a relatively new industry in Indonesia and has been growing faster than conventional banking,” Arviyan Arifin, president director of Bank Muamalat, told OBG. Although the rate of growth has been impressive, this has been from a low base – assets reached Rp229.6trn ($22.96bn) in October 2013, 4.82% of banking sector assets.

Other Indicators

Such rapid credit growth has outpaced deposits, whose growth slowed from 19% in 2011 to 15.8% in 2012. As such, the sector’s aggregate loans-to-deposit ratio (LDR) has risen swiftly from 72.1% in January 2010 to 83.6% by end-2012, reaching a 15-year high of 88.68% by July 2013 according to BI. As liquidity dried up from late 2012 onwards, loans denominated in local currency reached a 89.7% LDR by October 2013. Amidst strong growth in dollar-denominated deposits in 2013 (as exporters delayed conversion to rupiah in expectation of a sustained exchange-rate fall) and stable dollar lending, the system’s foreign-currency LDR has trended upwards from 82.6% in mid-2012 to around 89.5% by October 2013, according to BI.

Taking Action

As part of monetary tightening measures that were announced in August 2013, BI is reducing its LDR ceiling from 100% to 92% by December 2013 to restrain credit growth. “The priority now is to restrain domestic demand through hikes in the benchmark interest rate and other instruments to constrain credit growth,” Epyanto told OBG. Only banks with capital adequacy ratios (CAR) of above 14% will be allowed to exceed this limit, given their potential for additional wholesale funding leverage to fund the excess.

“The reduction in the LDR ceiling to 92% will curb lending growth for the more aggressive banks, which I think is necessary after such rapid growth, and will help curb growth in the current account deficit. However, some banks may prefer to raise deposit funding rather than slow down their loan growth,” Anton Gunawan, Bank Danamon’s chief economist and executive vice-president, told OBG. Banks expect lending growth to fall below 20% in 2013 for the first time in three years, while BI is targeting a 17% rate.

Interest-Driven Profit

Bank profits have remained consistently high, with a return-on-assets (ROA) ratio of 3.03% in 2011 and 3.11% in 2012, moderating only slightly to 3.09% by October 2013. This is more than double the regional average of 1-1.5%. The key driver of profit remains net interest margins (NIM) – the spread between deposit and lending rates – which have moderated only slightly from 5.91% in 2011 to 5.49% in 2012 and 5.50% by October 2013. Relying on deposits for most of their funding – and especially lower-cost current accounts and savings accounts (CASA) rather than costlier time deposits – banks have leveraged cheap funding to sustain high credit growth, although strains emerged given the rapidly rising LDRs.

While CASA deposits are short term in nature, they have historically remained a stable funding source for the Indonesian banking sector. “The majority of deposits are still for one-month terms,” Julita Wikana, director at Fitch Ratings Indonesia, told OBG. “But since these tend to be rolled over, these CASA deposits end up being quite sticky and are less costly than time deposits.” Although higher interest rates in 2013 will curb banks’ NIM further, consensus forecasts expect these to remain above 5%.

Non-interest revenue growth, from the likes of transaction fees, wealth management and bancassurance, has remained more moderate, growing by single digits and accounting for less than 30% of bank income. This may change, however. Agus Yanuar, president director of Samuel Asset Management, told OBG, “Interest rates used to be double digits and people placed their money in bank accounts, but now, with higher inflation and lower rates, people demand more sophisticated investment products.”

The quality of assets has sustained its improvements since 2009, with the ratio of non-performing loans (NPL) to outstanding credit falling from a high of 7.6% in 2005 to 3.1% in 2010 and a historical low of 1.9% by October 2013, according to BI. Banks maintain prudent loan-loss provisioning to guard against any uptick in NPLs, according to Fitch.

Given the expected rise in NPLs up to 3% of total loans in the coming year according to Mandiri, these buffers will be useful. As credit growth slows and banks’ NIM moderates gradually, Moody’s forecasts a greater focus on fee income in coming years, as banks leverage their operations in order to crosssell fee-generating products.

Capital Buffers

Despite the strains caused by rapid growth, Indonesian banks typically remain well capitalised and prudent. Although their CARs have trended downwards from 21.2% in 2006 to 18.48% in October 2013, these remain significantly higher than the BI floors – which stand at between 8% and 14% depending on their risk profile.

The majority of these capital buffers consist of the highest-quality Tier-1 capital, whose core capital ratio has risen from 15.48% to 16.66% in 12 months to October 2013. With only two banks issuing foreign-currency debt, BNI and Bank Rakyat Indonesia (BRI), banks have largely been spared the strain from the rupiah’s depreciation since May 2013. Meanwhile, banks’ net-open positions (NOP) – the level of un-hedged foreign-currency exposure – remains low at 2% of bank capital, according to Fitch in August 2013, well below BI’s 20% ceiling.

While there are variations amongst banks, significant linkages to foreign institutions can help minimise the scope for systemic risk. “The highest foreign-currency NOPs are maintained by banks with substantial foreign ownership like Bank Internasional Indonesia (BII),” Iwan Wisaksana, director at Fitch Ratings Indonesia, told OBG.

Liquidity

More worrying, the drying up of liquidity for many lenders caused the average liquid assets ratio to fall from 19.13% in May 2012 to 15.6% by July 2013. “While the big four banks have ample liquidity, smaller lenders face a liquidity shortage and have started hiking deposit rates, sometimes above the 7% ceiling covered by the deposit insurance scheme,” Gunawan told OBG. In August 2013, BI enacted a second tightening measure by hiking the secondary reserve ratio, which covers securities like equities and bonds, from 2.5% to 4%. Although this had limited impact, given most lenders’ holdings above this level, it provides another avenue to inject liquidity into struggling banks. “The hike in secondary reserve requirement strengthens the liquidity buffer for small banks,” Helmi Arman, economist at Citibank Indonesia, told OBG. “By having ample government bond holdings, they could better access BI’s repo liquidity facility if the need arises.”

Fragmented But Segmented

Aggregate figures obscure significant contrasts in Indonesia’s diverse banking sector. Although the 2004 Banking Architecture plan aimed to reduce the number of players to as few as 30 in the longer term, the market still had 120 lenders as of October 2013, down from 124 in 2008. Accounting for 75.38% of total financial-sector assets by end-2012, banks play a key role in providing financial access. These include a range of different institutions: four state-owned banks, 36 foreign-exchange commercial banks, 30 non-foreign-exchange banks, 26 regional development banks owned by provincial and district governments, 14 joint-venture banks involving foreign investors and 10 foreign banks.

A total of 1683 rural banks, some 190,000 savingsand-loans cooperatives, and over 600,000 microfinance institutions (both formal and informal) extend access to remote areas of the country, although their combined Rp75.5trn ($7.6bn) in assets is less than 2% of total commercial bank assets.

In November 2012, BI introduced new segmentations of banks according to assets. As of October 2013, the first group covers those with assets under Rp1trn ($100m) and includes 11 lenders, which can offer basic services but cannot build new branches, operate electronic banking or offer foreign exchange transactions; the second, with assets under Rp10trn ($1bn), covers 52 banks that are barred from offshore transactions; the third group, with assets under Rp50trn ($5bn), includes 35 lenders that can offer all products but must allocate 25% of their capital to branch expansion including in remote locations; and the fourth group of over Rp50trn ($5bn) includes 22 banks able to offer all services and expand nationwide. BI will also require conventional banks operating sharia-lending windows to spin them off into separate subsidiaries by 2023.

In addition, the banking regulator is hoping to encourage banks to expand their networks to lesscovered areas, given their high concentration in some regions. In 2012, for instance, state-owned banks such as BNI and BRI had over 40% of their branches outside of Java, while some private banks were concentrated on the island – Bank Central Asia (BCA), for example, had 79% of its branches on Java.

Commanding Heights

Despite the industry’s fragmented nature, the top 15 lenders dominate the market, accounting for 71% of total sector assets in 2012. Foreign investors play a major role in the top tier: Malaysia’s CIMB holds a stake in Indonesia’s fifth-largest bank, CIMB Niaga; the UK’s Standard Chartered owns part of the eighth-largest player, PermataBank; Malaysia’s Maybank is part-owner of ninth-largest BII; and Singapore’s OCBC holds a stake in OCBC NISP, the 11th-largest bank.

Furthermore, foreign banks like HSBC, Citibank and Singapore’s UOB also feature amongst the largest banks. Despite this sizable foreign presence, however, the market remains dominated by local lenders. The “big four”, all publicly listed but three of which are majority state-owned, accounted for 45% of deposits, 43% of loans and 43.9% of assets, according to a June 2013 report by Moody’s.

Mandiri

Bank Mandiri, the largest bank by branch network and assets (Rp571.8trn, $57.18bn as of July 2013), resulted from the merger of four failing banks in 1998 and is 60% state-owned. Traditionally a wholesale bank, it has diversified into micro, small and medium-sized enterprise (SME) and consumer lending, which together accounted for 30% of lending and half of revenue in 2012, alongside insurance, securities, sharia and consumer finance operations.

Having completed a Rp11.69trn ($1.17bn) rights issue in 2011, Mandiri delayed plans for a $800m Eurobond in the second half of 2013 in favour of a foreign-bank credit line. The lender is seeking to shore up its CAR, which stood at 15.55% in the first half of 2013, the top tier’s lowest. Although CASA accounts for 64.67% of its funding, Mandiri had the big four’s lowest NIM of 5.42%, but moderately high ROA of 3.47% and ROE of 25.6% in the same period.

In the first half of 2013, Mandiri reported a 16% y-o-y increase in net profits to Rp8.29trn ($829m), which was driven by 20% growth in lending, a 19.4% increase in net interest and premium income to Rp16.46trn ($1.65bn), and 13.8% growth in fee revenue to Rp6.5trn ($650m).

While Mandiri stopped accepting new loan applications from August 2013, given its LDR of 82.75%, the bank is aiming for annual loan growth of 17-20% for 2013. Furthermore, for every one point increase in BI’s interest rates, Mandiri’s profit is expected to rise 2.2%, according to Bahana. The lender sustained its downward trend in its gross NPL ratio, reaching 1.77% in the first half of 2013, while its NPL coverage ratio stood at 117%.

BRI: Originally established in 1895 as “the people’s bank”, BRI has traditionally focused on micro-lending in rural areas through a network of over 4000 rural units, covering 5.9m micro-borrowers by June 2013. BRI is the oldest and second-largest bank by assets, worth Rp538.3trn ($53.83bn) in June 2013, and is 56.75% state-owned. In recent years, the lender has expanded to provide SME and consumer loans.

While BRI’s CASA to total funding ratio is lower than Mandiri’s, at 58.66% as of June 2013, BRI consistently records the market’s highest profitability given the higher-yielding nature of its loan book – the bank’s policy is for micro and SME loans to account for 80% of its book. Its 33.05% ROE and 4.62% ROA in the first half of 2013 were market leaders, while its 8.08% NIM was second only to Bank Danamon’s. In April 2013 BRI issued $500m in five-year Eurobonds to support further growth given its LDR of 89.25%.

The lender is targeting 20-22% loan growth for 2013, having grown its loan book 28.5% y-o-y by June 2013, with a 1.81% gross NPL ratio and a high NPL coverage ratio of 201%. The lender remains more exposed to the impact of interest-rate hikes, however, given the quicker impact on deposit rates, with Bahana estimating its net profit drops 2.5% for every one point rise in benchmark rates.

BCA

The largest private bank by assets (and third overall), at Rp450.8trn ($45.08bn) in June 2013, BCA holds the market’s highest share of deposits. Established by the Salim Group in 1957, the bank was nationalised in 1998 and sold to the Hartono family in 2002 (which currently owns 47.15%). BCA has expanded its market beyond the core focus on Chinese-Indonesian clients to the mass market. It has also diversified into insurance, securities, investment banking and property. The bank has rebalanced away from corporate lending since 2008 towards SME and consumer loans, and boasts the industry’s highest CASA share, at 81.85% in June 2013 – the only bank able to fund its entire loan book through CASA according to Moody’s.

BCA is the largest payments bank, operating its own closed-loop payment system, and is the least exposed to interest-rate movements. Indeed, Bahana estimates that each one-point increase in interest rates boosts BCA’s profits by 2.5%. The lender’s profitability remains lower than the top two, with a ROE of 24.57% and ROA of 3.42% in the first half of 2013. Net profits grew 19% to Rp6.3trn ($630m), driven by 24.1% y-o-y growth in lending to Rp280.4trn ($28.04bn), a 22.5% rise in operating income and 5.95% NIM. There is room for further credit expansion, as the bank has a low LDR of 73.2%, a gross NPL ratio of only 0.42% and LDR coverage of 384.5%. It aims to expand lending by 20% in fiscal year 2013.

BNI

The fourth-largest bank by assets, at Rp329.2trn ($32.92bn) in June 2013, is BNI. It has the lowest asset quality of the quartet, given its focus on SME lending, which accounted for 28.8% of all loans in the first half of 2013, and this boosted NPL ratios above 5%, according to Moody’s, higher than its aggregate gross NPL ratio of 2.55%.

Originally established as Indonesia’s central bank in 1946, BNI was converted to a commercial bank in 1955 and is still 60% state-owned. In addition to its SME portfolio, BNI specialises in corporate and infrastructure business, which combined account for 74% of its lending. The bank achieved 24% loan growth in the year to June 2013, while its NPL ratio improved notably from 3.44% to 2.55%. The bank achieved a 30.2% y-o-y rise in net income, with a ROA of 3.39% and a ROE of 21.78% in the first half of 2013, backed by 23% net interest income growth and 22% noninterest growth. BNI commands a stable low-cost funding base, of which CASA accounted for 67.9% in June 2013, allowing the bank to increase its NIM from 5.8% to 6.2% y-o-y. The lender raised $500m through a Eurobond issue in 2012, while its CAR stood at 16.27% in June 2013, second only to BCA’s of the big four. With a LDR of 84% in June 2013, the lowest of the state-owned lenders, BNI aims to achieve 19-21% loan growth in financial year 2013. Bahana estimates BNI’s profit rises 1.3% for each onepoint increase in benchmark rates.

CIMB Niaga

While only 60% of BNI’s size, Bank CIMB Niaga’s June 2013 assets of Rp202.2trn ($20.22bn) place it amongst top tier banks in fifth place, well ahead of Bank Danamon’s Rp158.1trn ($15.81bn). The top five’s only foreign-owned lender, 77.24%-owned by Malaysia’s CIMB Group, the bank resulted from the 2008 merger of Bank Niaga and Bank Lippo. Following an initial period of rapid growth in consumer lending and sharia finance, CIMB Niaga slowed its credit growth in 2012 to 16% y-o-y, in order to shore up its liquidity and CAR positions.

With CASA accounting for only 33.7% of its funding by June 2013, its LDR reached 99.17% and its CAR improved 0.82% y-o-y to 15.89%. While its loan growth fell to 10% y-o-y in the first half of 2013 and its NIM moderated to 5.26%, the bank has sought to generate fee revenue growth by leveraging its bancassurance and sharia lending arms. However, profit growth of 8% y-o-y to Rp2.13trn ($213m) in the first six months of 2013 remains lower than that among the big four, as does CIMB Niaga’s 19.54% ROE and 2.81% ROA. These 2013 values follow a 33% surge in net profits in 2012, however, driven by a 29% increase in fee revenue and a 22% rise in net interest income. Given the bank’s focus on car financing and credit cards rather than lower-margin, low-income mortgages, CIMB Niaga has successfully controlled its NPL ratio, which was at 2.25% for the first half of 2013, with a coverage ratio of 108.8%.

M&A

The market has witnessed a few foreign-driven mergers and acquisitions (M&A) in recent years. The last majority-stake purchase was Qatar National Bank’s (QNB’s) acquisition of Bank Kessawan in 2011. Since then only minority stakes have been sold, including the acquisition by Malaysia’s RHB Banking Group of a 40% stake in Bank Mestika Dharma, due for completion at the end of 2013; Japan’s Sumitomo Mitsui Bank’s purchase of a 40% stake in state-owned lender Bank Tabungan Pensiunan Nasional in May 2013 for roughly $1.5bn; and South Korean Woori Bank’s acquisition of a 33% stake in Bank Himpunan Saudara 1906 in June 2013. The following month, Bosowa purchased a 14% stake in the rural-focused micro-lender Bank Bukopin, and in November of the same year, Bosowa suggested it may aim to increase its stake to 40%.

Japan’s Mitsubishi UFG and China Construction Bank also have expressed interest in acquisitions. Although BI has sought buyers for Bank Mutiara – the bank formerly known as Bank Century, which was bailed out in 2008 – buyers’ valuations remain below the bail-out cost and a deal seemed unlikely in 2013. Forthcoming acquisitions appeared to be put on hold in July 2013, when Singapore’s DBS withdrew its offer to purchase a controlling stake in Bank Danamon following BI’s objections at the lack of reciprocal access to banks in DBS’s home market.

The ASEAN Economic Community could pose challenges for local firms as foreigners enter the market in 2015. “Many overseas banks are eager to enter the local market and the industry needs to enforce proper regulations and let the Indonesian banks keep pace with their foreign competitors when the single economic union takes effect,” Armand B Arief, president director of UOB Bank, told OBG.

Systematic Reform

The failure of the DBS-Danamon deal marks a watershed in BI’s supervisory stance at a time of significant structural change. From January 2014, BI’s bank supervision functions will be transferred to a new independent regulator, the Financial Services Board (Otoritas Jasa Keuangan, OJK), which has already been overseeing nonbank financial institutions in capital markets and insurance since 2013. Some 1300 BI staff will transfer to OJK, which after initial years of government funding – at Rp2.4trn ($240m) in 2014 – will levy a charge on bank assets (the level of which was still under discussion at the time of writing). “The OJK needs to assert itself from the start and take control, with transparency being particularly important in order to remain impartial and separate from the activities of competing political parties,” Bien Subiantoro, president director of Bank BJB, told OBG.

In mid-2012, BI unveiled a range of reforms for its 2004 Banking Architecture policy. Effectively repealing its “single presence policy”, BI implemented new rules limiting single-group bank ownership to 40% for financial institutions (FIs), 30% for non-FIs and 20% for individuals. Exceeding these limits is possible for FIs demonstrating good governance and a commitment to lending for productive purposes, provided they feature amongst the 200 largest banks globally with over 6% group Tier-1 capital ratios. In March 2013 BI imposed a five-year moratorium on increasing stakes beyond 40%. This effectively penalises potential foreign acquirers: Basel III rules in many foreign jurisdictions require banks holding minority stakes of over 10% to deduct such stakes from their capital, meaning most foreign institutions only want majority stakes, for which no capital deduction is needed. Given that Indonesia will not have to implement Basel III until 2019 at the latest; however, local acquirers are not constrained in this way.

A number of laws under consideration by the House of Representatives in the fourth quarter of 2013 seek to safeguard against potential bank failures in periods of tightening liquidity. The first, a financial system safety net, aims to set operating rules for bank bail-outs, assigning responsibilities between the Ministry of Finance, the regulator (OJK from 2014) and the deposit insurance corporation, which guarantees deposits up to Rp2bn ($200,000) below fixed interest rates, which stood at 7% in October 2013. Parliament was also considering rules requiring foreign banks to incorporate onshore, in a bid to ring-fence potential contagion from problems at the group level, although, at the time of writing, it remains uncertain whether these measures will pass.

Structural Inefficiencies

While profitable, Indonesian banks have high cost-to-income (CTI) ratios that reflect structural inefficiencies and the difficulty of providing banking services in a country with 6000 inhabited islands, where two-thirds of the population live outside of cities. Although costs remain high, financial access for both SMEs and the retail mass market remains low. In 2011, the World Bank estimated that some 51% of the population was without access to financial services, 72% had never received a loan and only 19.6% had a formal bank account. Although the bank industry’s aggregate CTI dropped from 85.4% to 74.1% between 2011 and 2012, it is still worse than that of many of Indonesia’s neighbours, which average 40-60%.

With personnel costs accounting for 50-60% of overhead, according to PermataBank, wage inflation and restrictions on foreign employment have kept costs high. While the interconnection of ATMs in June 2013 marks an encouraging step towards increasing infrastructure sharing, the establishment of a national payments gateway in 2015 will be key to improving the efficiency of clearing and settlement. Requirements for larger banks to expand their networks to more remote locations may keep costs high in the near term, however, BI expects that lenders will expand in capital-light channels through branchless banking and generate higher fee revenue (see analysis).

Foreign bankers also see high costs as symptomatic of the central bank’s new restrictions on bank ownership. “Indonesia will be a battleground between vested interests and the 250m people who want cheap, high-quality banking services,” Fauzi Ichsan, Standard Chartered’s senior economist, told OBG. “Eventually high NIM will become a political issue.”

Lending Caps

Alongside efforts to expand financial access, BI is also seeking to cool the rapid growth of consumer lending and sanitise lending practices. It tightened loans-to-value (LTV) caps for motorcycles (to 75%), cars and houses (both 70%) in June 2012 to improve credit approval standards and guard against excessive deterioration in asset quality.

“The new LTV caps on vehicle financing had a far greater impact on motorcycles than on cars, since lower-income clients are much more sensitive to price and down-payments,” Saut Parulian Saragih, PermataBank’s head of strategy, told OBG. Sharia lenders (both standalone and those operated as sharia windows in conventional banks) were exempt from the rules until April 2013, allowing certain banks to temporarily channel credit beyond these caps through their subsidiaries.

Despite a second measure limiting LTVs to 60% on second-house purchases of over 70 sq metres in early 2013, growth in mortgages was sustained at 16.5% y-o-y to Rp248.7trn ($24.87bn) in June 2013, according to BI, albeit from a low base – the value of mortgages reached 5% of GDP in 2012, compared to 16% in China and 32% in Malaysia as per KKR data. “The average maturity of mortgages has considerably lengthened since 2009, from an average of 5-10 years to 10-15 years and up to a maximum of 20 years,” Julita told OBG. “Private banks are also offering longer fixed-rate teaser periods of up to five years, longer than the average two.”

New rules were introduced in August 2013 that shift risk from banks to developers by prohibiting mortgages for purchases of second homes in preconstruction phases and limiting disbursal of mortgages according to the degree of completion. “Banks’ mortgage-related NPLs are still quite low, with industry NPLs ratio at about 2.3%,” Julita told OBG. Mortgage providers expect strong growth in 2013, albeit lower than 2012, with BNI aiming at 30-32% y-o-y growth and BCA at 20%, compared to 49% in 2012.

In light of a widening current account deficit, BI is also discouraging banks from lending to highly import-dependent sectors like telecoms, construction and automotive manufacturing in a bid to cool capital and intermediate goods imports.

“We feel that medium-sized loans can be a risky area for banks, particularly when you are dealing with ambitious entrepreneurs who may put caution to one side while eyeing expansion,” Bien Subiantoro, president director of Bank BJB, told OBG. “This is an area which banks must keep a close eye on in 2014.”

While higher corporate bond rates may spur a shift towards bank lending in the near term, banks are tightening credit approval to comply with lower LDR limits. “A tighter LDR ceiling will prompt a slowdown in lending in the second half of 2013 and first half of 2014,” Haryanto Suganda, HSBC’s senior vicepresident and head of business banking, told OBG.

Outlook

Following over a decade of high profitability and fragmentation, Indonesia’s banking sector faces the twin challenges of increasing intermediation with the real economy and gradually lowering margins. As larger, more efficient banks capitalise on their positions, smaller lenders will need to innovate and study potential M&A to sustain their positions. Over the medium term, as the banking system faces increased ASEAN-wide competition, Indonesian banks will need to work at improving their efficiency.