WITH the Indonesian banking scene picking up steam, Malaysian banks have begun to see higher profit contributions from their Indonesian units. This is in stark contrast to a few years ago, when banks in Asean’s largest country were grappling with deteriorating asset quality and falling earnings.
Both Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd saw higher earnings contributions from their Indonesian subsidiaries for the financial year ended Dec 31, 2016.
CIMB Group’s PT Bank CIMB Niaga Tbk saw its net profit soar 386.4% year on year to IDR2,082 billion as its financial performance continued to improve, while Maybank-controlled PT Bank Maybank Indonesia Tbk saw its net profit jump 71% y-o-y to IDR1,948 billion.
Both subsidiaries saw their asset quality and net interest margin improve. Indonesian banks are among the top performers in Asean year to date, according to HwangDBS Vickers Research.
“Indonesian banks were the second best performers with an 11% return after Philippine banks with a 14% return year to date (as at March, based on the local currency). In the near term, we believe Indonesian banks will continue to rally on the back of positive macro drivers as well as the possibility of a sovereign rating upgrade (to investment grade) by S&P,” says the research house in a March 27 report.
“Indonesian banks are currently trading at 1.5 times FY2017 price-book value (P/BV) or +1 standard deviation (SD) mean P/BV multiple on a simple average basis. It re-rated from a low of -2SD (1.2 times FY2017 P/BV) a year ago when banks saw a nasty credit cycle emerging, coupled with a bleak outlook. Current book values are higher than two years ago as banks have revalued their assets. This also resulted in lower returns on equity (ROEs) in 2016. We expect ROEs to gradually re-rate closer to mid-teens in the next two years as credit costs normalise.”
On the banking sector’s outlook, Maybank Indonesia president director Taswin Zakaria says it really depends on government spending. “If the government is committed to the investments in infrastructure, yes, we will see growth there. We know that for the last two years, the growth has been from the domestic economy. And where is that coming from? Obviously, the government’s continued investment in infrastructure. I am quite hopeful from that perspective that we may be able to see better growth than last year in 3Q and 4Q.”
Another research house notes that after two years of zero growth, Indonesian banks’ earnings are projected to reach the high teens in 2017E (consensus: 17%) and 2018E (consensus: 16%). “While we expect net interest margins to shrink for some time, they should be more than offset by lower credit costs. We have revised earnings by 2% for 2017/18E following the 2016 results,” it states in a March 21 report.
The research house observes that the Indonesian economy is accelerating, but no one has noticed. “While real GDP growth remained stable at 4.9% to 5% y-o-y in 3Q2016 as well as 4Q2016, Indonesia’s nominal GDP jumped from a two-decade low (post-Asian financial crisis) of 7.1% y-o-y in 3Q2016 to 8.6% y-o-y in 4Q2016. Our economists forecast nominal GDP to pick up further to 9.2% in 2017 (versus 7.6% in 2016). This augurs well for banks’ loan demand for working capital, even though the investment cycle may gain momentum only with a lag in 2018.
“Asset quality stress peaked in 2016. We believe the total loans-at-risk (NPLs + special mention + restructured loans) peaked last year, although the reported NPLs may rise seasonally in 1Q2017. Yes, the restructured loans are almost as much as reported NPLs, which means the risk of relapse remains high. We believe the incremental loan-at-risk formation should start falling this year. Our analysis of cash flow as well as profitability of the Indonesian corporate sector clearly shows they bottomed out in 2015 — one year before the asset quality stress for banks peaked.”
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