Indonesian banks experience poor financial soundness in first quarter this year

Banks operating in Indonesia have showed poor financial soundness in the first quarter this year with negative profit growth, insignificant loan growth and increasing non-performed loan (NPL) ratio recorded in the period.

According to the data recently released by the Financial Service Authority (OJK), overall profits of Indonesian banks stood at 28.95 trillion rupiah (about 2.1 billion U.S. dollars) in the period ended in March this year, or 2.29 percent lower than 29.63 trillion rupiah (about 2.2 billion U.S. dollars) recorded in the same period last year.

Banks contributed the most profit drop were those grouped in BUKU 2 and BUKU 1 that saw profit drops of 41.48 percent and 2.46 percent respectively throughout the first quarter of this year.

The BUKU was a codification of banks grouping introduced by the central bank in 2012, divided into four grouping based on the amount of their assets. Banks with large assets were grouped in the top tier group of BUKU 4, followed gradually by banks with lesser assets in BUKU 3, 2 and 1.

Among the four banks grouped in BUKU 4, the largest state-run bank, Mandiri Bank, was the only bank that saw a profit drop. It posted 4.19 trillion rupiah (about 313 million U.S. dollars) of profit, or 23.67 percent lower than that of in the corresponding period last year. The other three banks of BUKU 4 posted slight profit growths during the period.

The bank also saw increasing NPL ratio to 2.89 percent in the first quarter this year, or higher than 1.81 percent in the same period last year.

To respond the NPL ratio surge problem, the bank that has the largest asset in the country planned to increase its reserves funds allocation up to 140 percent throughout this year, in which 130 percent of it had already done as of March.

"Allocating the reserve funds was essential to anticipate risk from the swelling NPL. Before it totally unpaid, we had covered it with the reserve funds,"Bank Mandiri President Director Kartika Wirjoatmodjo said on Monday.

OJK Commissioner Board Chief Muliaman Hadad said that the average NPL in national banks now stands at 2.8 percent, or lower than the maximum 5 percent in banking principles.

He said that debtors were still facing hardships in their business following economy slowdown in the nation that has been ensuing in the last few years.

Muliaman was optimistic that banks loan would be improving in the next periods with increasing demands and consumption would be seen during the upcoming Muslim festivity season.

"The second quarter would be a pivotal point for the banks, including their plans whether they want to revise their business plan or not,"Muliaman said here on Tuesday.

According to the data released by the OJK, loans channeled by national banks grew insignificantly to 4,029 trillion rupiah (about 301 billion U.S. dollars) in the first quarter this year, or only 8.48 percent from 3,174 trillion rupiah (about 237.1 billion U.S. Dollars) in the first quarter last year.

The central bank has set loan growth target up to 14 percent for this year.

Most of the loans went to working capital for corporations, followed by those for consumption and investment purposes.

(APD)