Indonesia's Bank Central Asia to Hold Back Expansion Due to Margin Squeeze

Bank Central Asia Chief Executive Jahja Setiaatmadja gestures during an interview with Reuters in Jakarta, Indonesia March 8, 2016. (Reuters Photo/Garry Lotulung)

By : Gayatri Suroyo & Cindy Silviana | on 10:42 AM March 09, 2016
Category : Business, Banking/Finance

Jakarta. Indonesia's biggest bank by market value Bank Central Asia (BCA) said it would hold back some expansion plans this year after regulators announced a series of measures that will lower banks' margins, its top executive said on Tuesday.

The government is targeting lowering banks' lending rate for companies to 9 percent by the end of this year from the current average of 12 percent, including by capping the maximum rate banks pay for savings.

Forcing banks to offer low credit rates by reducing costs of funding can pressure banks' margins, BCA President Director Jahja Setiaatmadja said.

BCA's net interest margin (NIM) may fall 50-70 basis points this year from 6.7 percentage points at end-2015 due to the measures, creating a "challenging" profit environment for 2016, he said.

"In a situation when [lending] rate is falling, it means margin is decreasing. We have to be more efficient in the sense that expansion ambition must be reduced," Setiaatmadja said in an interview with Reuters.

Setiaatmadja said BCA had planned to add 40 new branches and 2,700 ATMs this year but might have to cut back plans to 20 branches and 1,700 ATMs due to the margin squeeze.

The competition for liquidity is also expected to be tougher this year as banks compete with government bond issuance for savings, he said.

But BCA still wants to acquire two small banks this year as funding for the deal has been set aside since the plans emerged in 2014, Setiaatmadja said.

The two banks will cater to a niche market that BCA does not serve under a "cheaper and more accessible brand", he said.

"Maybe we will start to look around in June," he said, adding that the process might take a long time.

In 2015, BCA posted a 9.3 percent increase in net profit to Rp 18 trillion ($1.37 billion), one of the best performing Indonesian banks.

That compares to an estimated 6.7 percent drop in 2015 net profit in the overall banking industry, based on Indonesia's Financial Services Authority's statistics.

Banks in Southeast Asia's largest economy were hit by rising bad loans in 2015 as economic growth slowed to the weakest in six years, forcing them to set profit aside for provisions.

BCA's non performing loan (NPL) ratio increased marginally from 0.6 percent in December 2014 to 0.7 percent in 2015. The banking industry's NPL ratio was 2.5 percent as of end-2015.

Setiaatmadja said he expects BCA's bad loan ratio to stay at that level in 2016, as there will not be a dramatic economic recovery, while BCA's loan growth is targeted at 10 percent.

Reuters

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