Indonesias Banking Sector

Indonesia Data Talk: While the 1997 Asian financial crisis is now a distant memory, the scars inflicted by the crisis ensured that Indonesian banks have become more prudent in managing their capital requirements. Likewise, analysts have placed more scrutiny on key risk and leverage ratios, specifically the capital adequacy ratio (CAR) and the more stringent core capital to risk-weighted assets ratio as outlined by the Basel II banking risk management framework. Present data suggest that the aggregate CAR for Indonesias banks is well over the 8% minimum recommended by Basel II. Aggregate commercial banks CAR approached 17.41% in September 2012 while its associated core capital to risk-weighted assets ratio stood at 16.54%. The capital ratios of Indonesian banks improved sharply to 18.41% during January 2012, which was attributable to lower growth of risk weighted assets held by Indonesian commercial banks since the beginning of 2012. Foreign-owned banks and non-foreign exchange commercial banks, most notably, saw a CAR of 27.42% and 21.55% respectively, or a core capital to risk-weighted asset ratio of 26.40% and 19.60% respectively during September 2012. Despite their relatively conservative capital management stance, as a whole, Indonesian commercial banks have continued to see respectable returns over the years. Returns on assets (ROA) for commercial banks stood at 3.09% or an estimated return on capital (ROC) of 23.71% as of September 2012. State owned banks saw ROA as high as 3.7% or an estimated ROC of 30.14% during the same period, possibly attributable to the relative size of state owned banks as a whole, accounting for 36.00% of total commercial banking assets during the period while enjoying marginally higher net interest margins of 5.94% compared to the 5.45% aggregate commercial banking net interest margin. However, foreign owned banks and joint venture banks, in contrast, have seen relatively sluggish returns of late. While foreign owned banks and joint venture banks recorded a ROA of 3.20% and 2.27% respectively during September 2012, these returns reflect an estimated ROC of only 13.33% and 14.67% relative to the 23.71% ROC enjoyed by commercial banks. Returns declined sharply as profit and net interest income declined from a peak of IDR15.67 trillion and IDR10.64 trillion respectively during January 2012 to IDR9.10 trillion and IDR9.65 trillion during September 2012. Tighter regulation on foreign owned banks may see further pressure on these foreign banks returns as they may be required to hold at least 8% of their local third party funds in bonds. While regulations may be expected to tighten further due to higher turbulences perceived in the global capital markets, industry players and analysts alike are generally optimistic of further expansion of Indonesias banking sector in the light of robust economic growth. In addition, tighter regulations may be a boon as the banking sector seeks to avert a potential crisis to its banking sector in the event of liquidity issues.