Indonesian banks seek to strengthen fundamentals and shore up investment


Twenty years on from a severe financial crisis that still shapes the industry, the banking sector in Indonesia is crowded but rich in opportunity. A diverse array of banks and non-bank financial institutions (NBFIs) vie for existing customers and work to attract new ones, in what still remains a lightly penetrated market. With the world’s fourth-largest population, Indonesia is seen as having great potential, and continues to attract foreign investment.

Market strategies, however, are in a state of flux. A handful of major lenders, some of them stateowned, have built national branch networks and remain formidable competition for any lender following a nationwide universal banking model. Lenders are increasingly looking at financial technologies (fintech), in particular those that reach consumers via their mobile phones, as a way to scale up without investing time and money building a physical presence. With politicians and regulators overseeing the sector eager to see consolidation, the investment climate is attractive to foreign and domestic investors aiming to take stakes in several entities, combine them into one and pursue a technology-enabled growth strategy.

Lenders are increasingly looking at fintech, in particular those that reach consumers via their mobile phones, as a way to scale up without investing time and money building a physical presence


The modern history of the domestic banking sector traces its roots back to the late 1990s, when contagions from the 1997-98 Asian financial crisis spread to the Indonesian archipelago. This sparked loan defaults, requiring state intervention to bail out banks, some of which were nationalised. Sixteen banks were closed, and almost half of outstanding credit ended up being in default. The lessons learned in that period have lasted, and retroactive safety measures are still being implemented. In the wake of the crisis, the government decided to alleviate some of the pressure on its central bank, Bank Indonesia (BI), by creating a new financial regulator to handle licensees.


The Financial Services Authority (OJK), led by its chairman, Wimboh Santoso, ensures that the country’s financial sector activities are managed in an orderly, fair, transparent and accountable manner. The OJK is also tasked with supervising banks, insurers, capital markets and NBFIs. The migration of licences from BI to the OJK was still under way as of early 2019, however, as microfinance institutions remained under the supervision of BI.

The central bank is headed by its governor, Perry Warjiyo, who was appointed in May 2018, replacing Agus Martowardojo, whose term had come to an end. Another state institution important to the banking sector is the Indonesia Deposit Insurance Corporation (IDIC), led by Fauzi Ichsan.

The OJK’s Indonesian Financial Services Sector Master Plan 2015-19 outlines a series of reforms and institutional developments, including a statement of broad intent, which underscores the shifting focus of the banking sector. “If profit appeared to be the primary objective in previous eras of economic boom, financial system stability is now the mantra,” it noted. Specifically, the OJK aims for financial services development consistent with the country’s broader development goals for the real economy, and countercyclical policies that aim to smooth the peaks and valleys of the economic cycle. Another major goal is to broaden and deepen capital markets to reduce reliance on bank lending.

“In the past, banks were just expanding their businesses and networks as fast as they could, but now everyone is evaluating whether or not their strategies are right and positioned for future growth,” David Wake, financial services lead adviser at PwC Indonesia, told OBG.


The country’s banking sector and its economy as a whole remain exposed to external factors given its reliance on natural resources exports. The challenges in 2018, when banks lost 15% of their market capitalisation due to a weakening currency, were also previously experienced in 2013. The combination of a weak currency and global economic headwinds, along with the prospect of increases to benchmark interest rates by BI, wiped out 16% of the banking sector’s market capitalisation that year. Unlike during the financial crisis of the late 1990s, however, the country’s financial system oversight is now considered sufficient to avoid worse problems.

“We believe Indonesia’s banks, particularly the large and state-owned commercial banks, have good capital buffers and are well positioned to manage these pressures,” global credit ratings agency Standard & Poor’s (S&P) noted in their outlook for 2019.

Recent Performance

In 2018 assets, loans and deposits all rose for the third consecutive year. According to the latest data from the OJK, as of December 2018 the total value of assets at commercial banks stood at Rp8068trn ($57.2bn), an increase of 8.8% on Rp7387trn ($52.4bn) the previous year. Total loans amounted to Rp5295trn ($37.5bn), up 11.1% on Rp4738trn ($33.6bn) in 2017, while deposits registered Rp5630trn ($39.9bn), up 6.2% from Rp5289trn ($37.5bn). The loan-to-deposit ratio eased from 90.5% in 2016 to 89.6% in 2017, before increasing again to 94% at end-2018.

The beginning of 2018 was marked by a sudden uptick in the rate of non-performing loans (NPLs), from 2.59% in December 2017 to 2.86% in January 2018; however, by September this figure had fallen back to 2.66%. While net interest margins contracted from 5.47% in 2016, to 5.15% in 2017 and 5.18% as of October 2018, the IDIC’s Ichsan told local media that such levels were still the highest in Asia.

One metric that remained flat from 2017 to 2018 was the sector’s return on assets. For conventional commercial banks, the figure was forecast at 2.45% in 2018, unchanged from 2017, although S&P forecast an increase to 2.55% in 2019.

Sector Organisation

Licensees under BI and the OJK are a large and diverse group, totalling almost 2000 financial services providers. Of that, approximately 115 are deemed major conventional or sharia-compliant banks, pursuing national, regional or Jakarta-based strategies. Around 1800 are rural banks serving specific areas. The authorities maintain a list of systemically important lenders and mandate they hold extra capital on their balance sheets, but do not disclose the banks to which the extra buffers apply. There is a shortage of qualified bureaucrats to fill the number of supervisory positions that such a large list of licensees would require, and this is one reason the government is open to the idea of foreign mergers.

BI classifies banks according to core capital. Those with capital above Rp30trn ($2.1bn) are classified as general commercial banks (BUKU) 4; those with between Rp5trn ($354.5m) and Rp30trn ($2.1bn) in core capital are classified as BUKU 3; BUKU 2 banks have between Rp1trn ($70.1m) and Rp5trn ($354.5m); and BUKU 1 includes those with less than Rp1trn ($70.1m) in capital. Sharia-compliant banks and the Islamic windows of commercial banks are also included in BUKU categories.

Domestic Leaders

The largest banks in Indonesia can be owned by the state, domestic capital and foreign entities. The country’s top-four banks, all of them domestically owned, have pursued a growth strategy in recent years that has boosted both top and bottom lines. From 2013 to 2017 Bank Rakyat Indonesia grew its total asset base by 62%; Bank Mandiri, the largest bank by market capitalisation, grew by 38%; Bank Central Asia (BCA) was up 36%; and Bank Negara Indonesia rose 65%. Three of these banks are majority state-owned, with BCA the exception. One of the few family-controlled lenders in the top tier is Ban Pan Indonesia (Bank Panin).

The big four banks are growing at a faster pace than the next challengers. They accounted for 48.5% of assets in 2017, up from 45.9% in 2014, while the top-20 banks had a share of 79.9% in 2017, which was up just 0.1 percentage points from 2014.

Foreign Banks

The largest foreign-owned institution is Standard Chartered Bank, a UK-based lender which derives the bulk of its profits from Asian markets. In addition to its own operations in the country, it owns a 44% share in Bank Permata, the eighth-largest lender in the sector.

The government actively encourages foreign direct investment (FDI) in the banking sector, and global investors can expect to be both welcomed and able to negotiate their terms of entry. There remains a formal cap of 40% on FDI in banks, but regulators have signalled a willingness to waive this for foreign investors who wish to buy multiple smaller banks and combine them under a single licence.

“If you were willing to buy two banks and consolidate them, you might get an exemption from the rules,” Aditia Nelwan, associate at government affairs consultancy Vriens & Partners, told OBG. For example, South Korea’s Apro Financial Company purchased Bank Andara in 2016 and Bank Dinar in 2018 and plans to merge them. “Consolidation will be good, and with a weakening rupiah it would be cheaper for global investors to buy our banks,” the IDIC’s Ichsan said in September 2018.

Meanwhile, Japan’s largest lender, MUFG Bank, increased its stake in Bank Danamon in 2018 from about 20% to 40%, making it a controlling shareholder of the country’s sixth-largest lender. The 40% cap on foreign ownership of banks originally kept the bank from being acquired by Singapore’s DBS Bank in 2013. DBS, the biggest lender in the region at the time, had wanted to spend $7.2bn to reach a 67% ownership stake in the bank and integrate it with its other operations. Other active foreign financial groups include Japan’s Sumitomo Mitsui Financial Group, which took an initial stake in Bank Tabungan Pensiunan Nasional in 2013 and it has since increased its holdings to 40%.


Consolidation is likely to be an ongoing story in the short and medium term given the regulator’s desire to remake the roster of licensees. In addition to having fewer financial services providers, it has also established a single-presence policy, limiting any ownership group to a controlling stake in just one bank. The state defined a controlling stake as equity of 25% or more or other proof of effective control over any one institution.

Major ownership stakes likely to be offered to buyers include those in Bank Panin and Bank Permata. Regarding the former, since 2013 Australia and New Zealand Banking Group (ANZ) has been trying to offload its 38% stake, valued at about Rp9trn ($638.2m) in late 2018. Bank Panin is controlled by the Gunawan family, which has refused in the past to allow a large minority shareholder a seat on the lender’s board of directors. However, this attitude has shifted. In September 2018 it reportedly hired US investment bank Morgan Stanley to find a buyer.

Standard Chartered has declared its intent to sell a 44.6% stake in Bank Permata now that a restructuring of the latter has been completed. Bank Permata’s financial performance has improved since reforms; however, Standard Chartered recorded a $215m loss in 2016 as part of the restructuring process. This sale is part of the UK lender’s broader international strategy to emphasise wealth management for high-net-worth individuals with at least $1m in investable capital, counting Hong Kong and Singapore as its biggest markets for these types of customers. Rino Donosepoetro, CEO of Standard Chartered Indonesia, told OBG, “Qualified ASEAN banks (QABS) are becoming more numerous under the ASEAN Banking Integration Framework. This allows Indonesian QABs to open branches in Malaysia, for example, which makes it easier for Indonesian workers to transfer remittances back home.”


Credit markets are expected to continue the expand, but the outlook varies by market segment. Corporate loan growth was expected to be flat in 2018, according to PwC’s annual survey of bankers, whereas growth at a rate faster than 10% in the consumer market was projected.

Overall, loan growth reached 8% in 2017 and was forecast at 9% in 2018 and 10% in 2019. The corporate segment of the market causes CEOs the most concern with regard to loan defaults in the future, according to PwC’s annual banking survey. Furthermore, NBFIs are among the primary customers and are often involved in asset-backed lending, such as financing vehicles or mortgages.


The retail market is strong in part due to stable demand for vehicles in the country, in particular for motorcycles, which remain the most affordable alternative to cars. Motorbike usage climbs by between 5% and 6% per annum, and is expected to peak in 2023, according to Margono Tanuwijaya, president director of local NBFI FIF Group. “Usage in densely populated areas like Java or Bali is already very high,” Tanuwijaya told OBG. “In remote areas, however, the density of two-wheelers is still very low, which is unlikely to change in the long term,” he added. Sales of cars, however, are not on as positive of a growth trajectory, and stimulating expansion of this segment may require extending more credit to lower-income customers. “Car sales have been stagnant for three years. This implies that financing models have not changed significantly, and that the low- to medium-income segment is the key target group for multi-finance,” Siswadi, president director of ACC Kredit Mobil, told OBG.

Mortgage loans are the product most likely to drive major growth in retail, according to the banking executives interviewed in a 2018 PwC survey. Around 63% of respondents said they were targeting mortgages to drive growth in consumer credit in 2018. This was followed by 29% of executives prioritising credit cards, 27% unsecured lending, 25% auto loans and 19% targeting micro-loans.


The optimism is in part thanks to a change in the rules. From August 1, 2019 financial institutions will be able to offer mortgages to first-time buyers without taking a down payment. Previously, the minimum down payment was 15%. BI also eased the rule that forbade banks from lending to people to build houses for which construction had already begun. The central bank estimated that mortgage lending would grow by 13% in 2018.

While consumers presented fewer default concerns than corporations, PwC’s Wake suggested that banks would be bolder in lending to people if the market were transparent. “There is tremendous consumer opportunity in the future, but banks are challenged by the limited availability of consumer credit bureau information or history,” he told OBG.

Credit quality concerns have also been on the rise and rank as a top challenge for banking executives, according to PwC’s survey. Nevertheless, despite a recent positive trend in NPLs, they ranged between 3% and 3.56% of the total from 2013 to 2017. Another key concern for 2019 is potential interest-rate hike by BI in response to macroeconomic factors. When central banks change the lending rate, it causes a process of repricing throughout the sector for both deposits and loans. In Indonesia, however, it takes about three months to reprice most deposits and six months for loans. This means that there is a three-month period in which banks are left paying a new, higher rate to depositors, while still collecting the older, lower rate from creditors.


The central bank expected a slight tightening in liquidity in 2018, as a result of credit growth expanding at a rate of at least 10% but deposits at 9.4% or below. However, the country’s banks are considered well-funded and backstopped, particularly in a regional context. The Tier-1 capital adequacy ratio exceeded 20% as of May 2018, well above that observed in other banking systems in the region, according to the global ratings firm Moody’s, and had climbed to 22% by September.

Tier-1 capital includes shareholders’ equity and retained earnings, whereas Tier 2 features debt securities held by the institution, which are considered more likely to be defaulted on. The OJK’s Santoso said in late 2017 that the Basel III standards would be implemented in Indonesia, but that national interests would be prioritised in cases where a choice had to be made.

One intended departure is how risks are considered for government bonds held by banks. The aim, Santoso said, is to avoid unnecessary complexity in calculating these financial ratios. Basel III implementation in Indonesia involves six reforms that will be undertaken by the banks, in a phased process with a deadline of January 1, 2022.

Financial Inclusion

The government is moving to boost financial inclusion. While Indonesia’s microfinance lenders have been a mainstay, extending greater services – especially to rural areas – is an area in which fintech may help, especially given the ease of reaching customers via mobile phones (see Fintech chapter). According to a January 2018 Google Consumer Barometer survey, smartphone usage stood at 60% in Indonesia.

Around 51% of Indonesians lack access to bank account at a formal financial institution, compared with around 30% in regional peers Malaysia and Thailand. “There is a substantial demand for fintech that can reach customers fast,” PwC’s Wake told OBG. “The cost of customer acquisition through physical presence can be high, but technology is levelling the playing field.”


With NPLs low and credit growth expected at or near double-digit rates, the outlook for 2019 is largely a question of expansion. Global exposure means that further rate changes undertaken by the US Federal Reserve could have an impact. If Indonesia‘s central bank matches those rate hikes in order to retain demand for sovereign bonds, that could mean compressed net interest margins and boosting reliance on non-interest income such as fees to help grow profits. The central bank’s Warjiyo said in January 2019 that benchmark rates have neared their peak, but that he did not expect rate decreases. While further increases by the US Federal Reserve were anticipated at the time, later in the year the Federal Reserve said it did not expect more hikes in 2019. In the meantime, the sector can rely on strong fundamentals, a robust and improving regulatory framework and increasing domestic demand for banking services.

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The Report: Indonesia 2019

Banking chapter from The Report: Indonesia 2019

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