The state of the banking sector during the pandemic

INDONESIA - Report 02 Nov 2020 by Cyrillus Harinowo

The Indonesian economy has been impacted by the pandemic in the past few months. Various sectors of the economy, especially sectors related to people’s mobility, such as transportation, hotels and tourism, have, with some exceptions, been impacted the most. In addition, retail businesses and restaurants were also heavily hit. If that is the case, what has happened with the Indonesian banking sector? Just this past week a number of large banks published their financial reports for Q3. These banks account for one third of the Indonesian banking industry, so they may represent, in a broad sense, the Indonesian banking industry.

In general, the three large banks, two state banks and one private bank, reported that their assets continued to grow, supported by a steady rise in third-party funds. However, loan growth stagnated due to the disappearance of loan demand. Apparently, the business sector has focused its attention on managing cash flow in order to survive the pandemic. To help the business sector stay afloat, the Indonesian government encouraged the banking sector to provide loan restructuring facilities in order to help the business sector. Surprisingly, not all customers tried to utilize those facilities. In fact, maybe only fewer than one fifth of banks’ portfolios finally made use of the facilities.

Given the situation, banks prepared for the worst by increasing their provisions. Therefore, while their net interest revenues and fee income did not drop significantly, or in some cases increased somewhat, banks started to make large provisions that affected their profits. So far Bank BCA topped the league by reporting over Rp.20 trillion in profit, down 4.2% from the same period of the previous year. Bank Mandiri reported over Rp.14 trillion or a 30.7% decline, and Bank BNI, which ranked fourth in the Indonesian banking industry reported a Rp. 4.32 trillion net profit, down by over 60%.

On the external side, the Central Board of Statistics reported that the trade balance in September 2020 registered a large surplus. Exports for the month reached $14,008.4 million while imports in that month reached $11,570.9 million, bringing the trade surplus for September 2020 to $2,437.5 million. Cumulative exports from January to September 2020 reached $117,194.5 million while cumulative imports for the same period reached $103,680.8 million. Therefore, the cumulative surplus for the first three quarters of 2020 stands at $13,513.7 million. The September trade balance showed that the level of exports has started to approach its normal level.

The Central Board of Statistics also reported the Consumer Price Index for the month of September 2020, which resulted in deflation of 0.05%. With that monthly inflation, Y/Y inflation in September 2020 reached 1.42%, a level below the target inflation corridor. Given the level of Y/Y inflation, Bank Indonesia decided to keep the benchmark interest rate constant at 4.00% at its Monetary Policy Meeting in October 2020. This policy, together with other measures by the Central Bank, has succeeded in strengthening market sentiment on Indonesia.

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