Indonesian Banks' Loan Growth Outpaces Deposit Growth

Loan growth in excess of 20% annually has steadily outpaced deposit growth among Indonesian banks, thus competition for deposits will remain intense over the next 12-18 months.

"We expect competition for deposits to remain intense over the next 12-18 months, given the high system average loan-to-deposit ratio of about 90% at 31 March 2014, which was only slightly lower than the regulatory limit of 92%," says Alka Anbarasu, a Moody's Assistant Vice President and Analyst.

Moody's expects that the banks' funding pressures will lead to greater credit differentiation between the larger and smaller banks, because it will lower profitability more severely for the smaller banks, as they cannot fully pass on any extra funding costs onto borrowers.

"Nonetheless, any such credit differentiation will only occur gradually and over several quarters. So far, the contraction in the profitability of the banks has been moderate, and banks in Indonesia remain among the most profitable globally," notes Anbarasu.

Anbarasu also said that Indonesian banks are generally well capitalized and the economy remains robust; two factors that support sustainable loan growth, especially given Indonesia's low credit penetration.

According to Moody's, in the year to 31 March 2014, the average rates that Indonesian commercial banks offered on new one-month, three-month and six-month time deposits rose 248 basis points (bps), 273 bps and 218 bps respectively.

While  these increases have in part reflected higher policy rates, they were significantly larger than the increases in policy rates between June 2013 and November 2013.

System-wide net interest margins, on the other hand, fell to 4.3% at end-March 2014 from an average of 5.4% between 2012 and 2013.

Moody's report notes that Indonesia does not have a significant domestic market for wholesale bank funding that can provide banks with an alternative to funding loans with deposits.

"As for bottom-line profitability, we estimate that a 100 basis point increase in time-deposit rates will reduce our rated banks' average return on equity by three percentage points," says Anbarasu.

"Nevertheless, while funding pressures are affecting banks across the system, we note that systemic liquidity risk remains low," adds Anbarasu.

Moody's report says that most banks in Indonesia have sufficient high quality liquid assets such as cash, securities, and reserves held at the Indonesian central bank to cover a sizable deposit outflow.

Based on end-2013 data, 27% of total banking system assets were liquid assets, providing a buffer against any outflows of deposits triggered by sudden adverse events.


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