This report profiles Indonesia’s banking industry, discussing market trends through 2014 and outlook for 2015 and beyond. The report also highlights leading players in the sector including PT Bank Mandiri (Persero) Tbk (BMRI), PT Bank Rakyat Indonesia (Persero) Tbk (BRI) and PT Bank CIMB Niaga Tbk (BCN).

Indonesian banks have been the most profitable banks amongst the top 20 global economies in the last few years. High credit growth coupled with high net interest margins enabled the country’s commercial banks to reap enormous profits. However, the good times witnessed by the Indonesian banking sector in the last few years finally came to a halt in 2013-14. Trade deficit, spike in consumer price inflation and announcement of the U.S. Federal reserve stimulus tapering-off combined to create a hostile environment for the country’s banking sector. The trouble started with massive depreciation in the value of IDR, which eventually led to a huge surge in consumer price inflation. As a result, Bank Indonesia had to raise benchmark policy rates by 200bps between May 2013 and November 2014.

The banks have started feeling the heat. The cost of sourcing funds has risen and rate sensitive sectors are beginning to report increased non-performing loans (NPLs). As a result, banks have become more cautious in disbursing credit which has negatively affected the phenomenal credit growth in the last few years. Consequently, profit growth of the banks has also stagnated.

However, the long-term outlook for Indonesia’s banking sector is stable backed by sound financial position of its banks. The banks are adequately capitalized to meet minor downturns and the NPL ratio is within the comfortable range. Rising per capita income, growing urbanization and consistent economic growth bode well for the sector.

Key Points:

• Commercial banks led the country’s banking sector in terms of asset size as of August 2014, accounting for 94% of total assets. Rural banks only accounted for 1.5% of total assets. Within the commercial banking industry, state owned banks (SOB) accounted for 36% of total assets.

• The asset base of commercial banks in Indonesia grew at a CAGR of 16.2% during 2006-13.

• Total IDR deposits of commercial banks grew at a CAGR of 15% during 2006-13. Meanwhile, foreign exchange deposits grew at a CAGR of 18% during the same period. In August 2014, IDR deposits grew by 13% y/y while foreign exchange deposits grew by 10% y/y.

• Total credit disbursed by commercial banks grew at a CAGR of 22% y/y during 2006-13. In 2014, it grew by only 12% y/y, much less than its historic growth rate. Lower economic growth led to a smaller credit growth in 2014 compared to the previous years.