Indonesia banks to benefit from govt plan to boost economy

A close up of Indonesia currency


Indonesia’s top banks may get a lift from new government plans to spur the economy, which are seen boosting loan growth while allowing them to protect margins that are already among the world’s widest.
The Financial Services Authority, known as OJK, will lower the ceiling for deposit rates this month for major lenders, a step it intends to bring down lending rates to promote economic expansion, Nelson Tampubolon, head of banking supervision, told reporters Monday. The action will produce a one-percentage point savings for lenders, according to Haru Koesmahargyo, finance director at PT Bank Rakyat Indonesia, the nation’s second-largest bank by assets.
President Joko Widodo is enlisting the support of banks as he seeks to shore up flagging economic growth, a strategy that’s been used by other emerging Asian economies like China. Cutting banks’ deposit costs will permit them to offer cheaper loans without damaging profitability.
“Net net, it’s positive for the banking sector as it can generate loan growth,” Ivan Tan, a Singapore-based analyst at Standard & Poor’s LLC, said Tuesday in a telephone interview. “Overall the measure is to offset external headwinds that came with the China slowdown and lower commodity prices.”

Banking Stocks
The Jakarta Finance Index, which includes Indonesia’s largest banks, is little changed since February 26, the last trading day before the government announced its plan for deposit rate caps. That compares with a 1 percent gain by the broader Jakarta Stock Exchange Composite Index. The benchmark for financial stocks has declined 1 percent this year, while the broader index rose 4.1 percent.
OJK is seeking to increase loan growth by 13 percent to 14 percent this year, Chairman Muliaman Hadad said Feb. 25. Lending grew by 10 percent to 11 percent last year, according to S&P. In November, the regulator had initially set a target for loans to climb 12 percent to 13 percent in 2016.
Weighing on banks are non-performing debts, which may rise to 3 percent to 4 percent of the total outstanding this year, from 2.7 percent in November, according to an S&P estimate.

Benchmark Rate
The government’s current budget calls for the nation’s gross domestic product to increase by 5.3 percent this year, from a 4.79 percent expansion in 2015, the slowest in six years. So far in 2016, Bank Indonesia, the central bank, cut its benchmark interest rate by 50 basis points, to 7 percent, and lowered the reserve requirement ratio to 6.5 percent.

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