Putting a Brake on Lending

Entrepreneur's Story

By: Agustinus Gius Gala

Globe Asia-29 Januari 2009. Putting a brake on lending Bank Central Asia (BCA), the country's second largest bank by assets, will drastically slow lending growth next year due to economic uncertainty. The mood among the country's leading bankers is cautious. Purse strings have been drawn tightly. While the global financial crisis is not expected to have as distressing an effect as the Asian financial crisis of 10 years ago, bankers are not playing down the latest catastrophe, adopting a consolidation strategy in the areas of lending and liquidity to help ensure survival.

“There are just too many factors out there that have forced us to be extra careful,” says Jahja Setiaatmadja, deputy president of Jakarta-listed BCA, the country's largest financial company by market value.

The bank is putting an abrupt brake on lending due to lingering uncertainty in the economy. Jahja says that lending in 2009 is targeted to grow by 15%, much lower than the central bank's target of 22-24%. “We are more conservative,” says the senior banker. Other major banks such as Bank Mandiri, the country's largest in terms of assets, and Bank Rakyat Indonesia (BRI), the third largest, are also adopting similar strategies.

A senior official at Mandiri was quoted as saying that the bank aimed at lending growth of less than 18%, while BRI projects 15-20% growth. This is in sharp contrast to the aggressive lending growth in 2008. The central bank estimates that lending growth in the year at around 33%. BCA was even more aggressive as lending in the first nine months of the year surged by more than 53% to a whopping Rp105.5 trillion ($9.5 billion), about 44% of which went to the corporate sector including telecommunications, consumer goods, property and plantation companies. The remainder was in the form of consumer and commercial loans and lending to small- and medium-scale enterprises. With full-year 2008 lending expected to reach more than Rp110 trillion, fresh loans this year will reach around Rp16.5 trillion.

Jahja says BCA will prioritize loans to existing customers with good track records.The bank, however, will not shun industries which are currently undergoing a downturn, including palm oil plantations and coal mining. The trick is that BCA has been disbursing loans to a diverse range of industries but focuses on the top players at each industry. “The top players have the experience and capital to survive any downturn. They seldom fail,” says the BCA executive.Jahja explains a strategy of lending money to a booming industry but avoiding it during a down turn is not a good “ethic” for banks as every business has its own cycle. He points out as an example that when the oil price surged from $26 per barrel to around $60, the plastics industry suffered deeply as its cost of raw material soared much faster than the price of the goods produced. “We consistently supported them, and they are now in much better shape.”

Rising NPLs

Jahja, however, acknowledges that given the current global financial meltdown and economic slowdown a rising level of non-performing loans (NPL) is unavoidable. The crisis sent the rupiah plunging to a 10-year low of Rp13,000 to the dollar in November and caused a weakening of consumer purchasing power at home as the stock market collapsed. Despite the difficult conditions, the bank projects its NPL level to “only” increase to between 1-1.2% of total loans from 0.6% at the end of September. “We think such an NPL level is still manageable,” he says. The bank's NPL projection is much lower than the central bank's projection for the industry at about 5% next year, from the estimated average of 3.9% in 2008.

BCA nearly went under when it was hit by a run in 1997 as the Asian financial crisis escalated, prompting the government to take it over from its former owner, the Salim Group. This time around, it has taken measures to deal with the expected rise in NPLs by boosting provisions for bad debts to 350% of the non-performing loan level at the end of September. Such excessive provisioning is raising questions in the market. “We feel that BCA may be too conservative, prompting questions over the real quality of its loan portfolio, especially given the current global economic turmoil,” says Arhya Satyagraha, an analyst at PT Trimegah Securities.

Jahja responds by saying that the policy is necessary given the current global economic uncertainty. “We have said that we're committed to continue supporting our large customers (debtors). That's why we have made preparations that in case one or two companies go under, we have already allocated sufficient provision so that it would not threaten our earnings.”

Going forward, says Jahja, it is important for banks to closely monitor their loan quality as interest rates stay high, the rupiah tumbles and consumer purchasing power declines, all of which could weaken appetite for new bank borrowings and undermine sales at a variety of industries, which in turn could affect their ability to repay debts.

Maintaining liquidity

Jahja explains another important strategy of the bank in coping with the current crisis is to have sufficient liquidity. “One of the reasons for us not to be too expansive in our lending is to maintain liquidity,” he stresses. BCA, now majority owned by the Hartono family, one of Indonesia's richest and owner of the privately held cigarette giant Djarum Group, seems to have no problem in terms of liquidity. It is one of a few large banks in the country which have recently seen third party funds soar, which some analysts say was a result of depositors from smaller banks switching to larger banks in a flight for safety.

BCA saw its third party funds jump to a record of more than Rp200 trillion as of November 22. In addition, the bank has some Rp30 trillion invested in Bank Indonesia SBI promissory notes. Another factor that has become the envy of industry competitors is that BCA has lots of cheap funds, in the form of savings and demand deposits as opposed to more expensive time deposits, thus allowing the bank to be able to enjoy a relatively strong net interest margin of 6.2% (at September 2008) without putting too much interest burden on depositors.

Indeed, BCA managed to “only” raise its lending rate from 11% to 14% at a time when liquidity was tight, as compared to the 18-20% rate charged by other banks. “We're quite comfortable with our spread level,” says Jahja, adding that the bank still has room to cut its lending rate in the future given the current declining trend in the central bank benchmark rate.

Network expansion

Despite the current uncertain conditions, BCA aims to keep expanding its network. Jahja says that the bank will open more than 30 new branches in 2009, adding to the current 819 branches spread across the country. “While we're consolidating in terms of lending, we're expanding in terms of network. There is still a huge potential in Indonesia to collect savings from people and redistribute the funds,” he says. The bank recently acquired small-sized Bank UIB, and plans to convert it into an Islamic shariah banking operation, expected to start operating in September 2009. “There is still huge potential for shariah banking in Indonesia as its market share is still less than 3%,” says Jahja.

While other major banks began shariah operations a few years ago, some analysts said that it is typical for BCA to come late to the game, adding that it could eventually take a major share of the market. They note that the bank got off to a slow start in the provision of ATMs, but now has the largest number in the industry. Nevertheless there are some limits to BCA's ambitions: an earlier plan to acquire another financial institution in 2009 has been put on the shelf while the current economic downturn continues.