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 plays a modest role in the Indonesian economy, with loans amounting to 32.85% of GDP. This is considerably lower than in many neighbouring countries such as Malaysia (113.5%) and China (130%). Total credit has been growing rapidly in recent years, with a 24.4% increase in 2011, 23.9% in 2012 and 20.7% growth in the first half of 2013. Bank profits have remained consistently high, with a return-on-assets ratio of 3.09% by October 2013, which is more than double the regional average. Although rapid growth has put some strain on the banking sector, Indonesian banks continue to be well capitalised, with a capital adequacy ratio of 18.48% in October 2013, well above the central bank’s floor. Following over a decade of high profitability and fragmentation, the 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 mergers and acquisitions 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.
This chapter contains a banking viewpoint from Agus D W Martowardojo, Governor, Bank Indonesia; and an interview with Alan Richards, CEO, HSBC Indonesia.