Coronavirus is ravaging Indonesian bank’s clients

Bloomberg

The worst crisis in more than two decades among Indonesia’s smaller companies will boost loan losses and curtail profit at nation’s largest lender, according to PT Bank Rakyat Indonesia Finance Director Haru Koesmahargyo.
Bank Rakyat expects more than 10 million customers in its core segment — micro, small and medium enterprises — to be affected by the Covid-19 outbreak, Koesmahargyo said. With more and more borrowers seeking to restructure their loans and delay payments, the lender expects its bad loan ratio to edge higher this year, squeezing its profit margin, he said.
The bank is deferring principal and interest payment on its loans to companies and has already restructured 6.8 billion of debt extended to 1.4 million of borrowers. It may have to revamp more loans if the pandemic, which has so far killed nearly 1,391 people in Indonesia, lasts much longer, Koesmahargyo said.
“MSME’s want to work, do business and sell their goods, but to whom? People stay at home and don’t want to spend,” Koesmahargyo said in an interview. The smaller businesses fared much better during the Asian financial crisis of 1997-1998, because they were able to continue operating, he added.
With the economy hit hard by the pandemic, Indonesian authorities have taken unprecedented emergency fiscal measures, including abandoning a budget deficit ceiling enacted in the wake of the Asian financial crisis, to lessen the impact of the outbreak. The nation’s large banks are well capitalized today to withstand near term pressure from loan defaults and falling profit margins, a sharp contrast to their weak finances that forced them to seek state bailouts during the Asian crisis.
With micro, small and medium enterprises accounting for more than 50% of Bank Rakyat’s loan book, the highest among Indonesia’s top four banks, it may be impacted more than its peers even though the government has stepped in with financial assistance to stem job losses. While the lender sees the bad loan ratio rising to 3.7% this year, an increase from previous estimate of 2.5%, it expects the net interest margin to drop to 5.5% from a previous guidance of 7%.
He declined to give a forecast for full year profit but said he expects “an unusually below average performance in the bottom line by the end of 2020.”
The bank, which uses more than 30,000 agents for door-to-door canvassing and underwriting of loans from SME sector, is encountering resistance from customers to its push for technology in the new era of social distancing, Koesmahargyo said. “We are seeing double-digit increase in the number of digital transactions during partial lockdowns, but we still have so many customers who prefer face-to-face interactions with our agents or officers,” he said.
With Indonesia’s economy now set to expand 2.3% at best this year, Bank Rakyat has slashed its loan growth forecast to 5% this year from a range of 10%-11% set in January.
Its net income was little changed in the first quarter even as lending grew 10% from a year ago.
The sliding profit margin this year may depress Bank Rakyat’s return on equity, which was the highest among Southeast Asian banks at 18.4% in 2019, according to data compiled by Bloomberg. The bank may also see its net income dive by more than 25% this year as a result of loan restructuring, Suria Dharma, an analyst at PT Samuel Sekuritas Indonesia, said in a research.
Bank Rakyat expects to see its clients benefiting from 34.2 trillion rupiah set aside by the government as loan subsidies for micro, small and medium enterprises. The lender also has around 90 trillion rupiah of government bonds that it can use to obtain liquidity from the central bank, Koesmahargyo said.