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Indonesian central bank governor Darmin Nasution told bank executives at a dinner earlier this month that after the 2008 crisis, the global constellation had changed and created new, more complex, challenges.

“It is an inevitable thing that we are seeing external shocks and that we don’t know when the shocks will end,” he said.

One sure thing, amid the global uncertainty, was that he wanted the banking sector to help to stimulate the economy and operate in a more prudent way.

Darmin has been persistent in criticizing inefficiencies in the sector that created a “high-cost economy” due to high lending rates. 

In a bid to reflect the possibility of slowing exports due to decreased international demand, the central bank, Bank Indonesia, has lowered its growth forecast for the nation’s economy next year to 6.3 percent from 6.7 percent. 

It is, however, not a reason for lenders to lower their lending growth target. Darmin still expects lending at the nation’s 120 commercial banks to rise 27 percent in 2012, up from BI’s forecast of a 24 percent increase this year. Higher lending will help the economy to grow faster.

Brokerages and bankers had a different view about banks’ lending growth, despite being generally upbeat about the prospects for the sector. 

Trimegah Sekuritas, a local brokerage company, said in its 2012 equity strategy report released last month that loan growth at Indonesian lenders would slow to 19 percent in 2012 from an estimated 22 percent this year as a global slowdown curbs Indonesia’s economic expansion. 

Indonesia’s banking sector remains strong in terms of its capitalization, Trimegah said. Commercial banks’ average capital adequacy ratio, a measure of financial strength, stood at 17.15 percent in October, higher than the standard of 17 percent, set out as a global framework by the Basel III meeting in 2008. 

Indonesian banks also have low leverage, which refers to the ability to utilize capital. Indonesian banks’ leverage were relatively modest at 7.6 times, compared to regional and international banks’ leverage of 15-25 times. 

“With such a capital level, the Indonesian banking sector is ready to contain the tail risk and capture the increasing needs to fund a growing economy,” Trimegah said.

Trimegah maintained its “buy” recommendation for Bank Mandiri, the biggest lender by assets, and Bank Central Asia, the third largest. 

The broker set its price target on Bank Mandiri’s stock at Rp 9,000 and Rp 8,250 for BCA. Bank Mandiri’s shares climbed 4 percent this year to close at Rp 6,750 on Friday, while BCA rose 25 percent to Rp 8,000.

Trimegah forecast Bank Mandiri’s net income to rise to Rp 13.6 trillion ($1.49 billion) in 2012 from an estimated Rp 11.2 trillion this year.

It predicts BCA to book earnings of Rp 11.3 trillion in net income in 2012, up 19 percent from an estimated Rp 9.5 trillion this year. Bank Mandiri’s profit in the January-September period hit Rp 9.48 trillion, up 47 percent from a year earlier. BCA booked a 25 percent year-on-year increase in net income to Rp 7.7 trillion in the nine-month period.

Nomura Indonesia, the local unit of Japan’s largest brokerage house, also had a similar view. 

“We believe Indonesian banks can sustain their strong earnings outlook in the face of headwinds from global economic uncertainty in light of the pro-growth fiscal and monetary policies and prudent macroeconomic management in the country,” the securities firm said in its 2012 preview outlook issued this month.

Nomura recommended investors to “buy” stocks in Bank Rakyat Indonesia, the second-largest lender and Bank Mandiri because net interest margin — the difference between the interest rate banks charge their customers and the interest they pay their customers — is among the widest for these two banks. 

NIM, which measures the return on a bank’s investments relative to its interest expenses, was 5.1 percent for Bank Mandiri in the third quarter and 10.8 percent for Bank Rakyat.

“Among stocks under our coverage, we see BRI as offering the most attractive earnings and share price potential upside in a declining interest rate environment in Indonesia, as its net interest margins appear to be most insulated from competition, while a rising contribution of high-margin micro-credit in its loan portfolio has widened NIMs in the past two quarters.”

Even as banks’ interest spreads help to maintain some measure of assurance on profitability, pressure may come from the central bank’s intention to bring down banks’ margins on their loan business so that borrowers are less burdened.

BI slashed its benchmark overnight rate by a combined 75 basis points in October and November to a record low of 6 percent with hopes that lenders would follow by cutting their own lending rates.

Lending rates among Indonesian banks, according to BI data, were falling at a slower pace than the central bank’s rate cuts.

The average lending rate on working capital loans fell from 12.45 percent in January to 12 percent in November; for investment loans, from 11.85 percent to 11.70 percent; and for consumption loans, from 13.5 percent to 13.4 percent, according to central bank data.

In the same period, the BI rate has fallen by half a percentage point, factoring in the central bank’s 25 basis point increase in February.

Darmin, a former director-general of the tax office at the Finance Ministry, was not happy with the way the nation’s lenders were working.

Since March, Darmin has required banks with assets of more than Rp 10 trillion to make their prime lending rates publicly available. 

The policy, he said, will be “accompanied by enforcement” to ensure that lenders include targets for reduced lending rate levels and improved efficiency in their business plans.

Gatot Suwondo, president director of Bank Negara Indonesia, said that the central bank’s policy does not address the main problem, that too many banks in Indonesia — 120 of them — are competing for the same funds from customers.

Banks have been raising their deposit rates to secure funds from new customers, but at the same time that is narrowing their margins. Indonesia’s population of 240 million is the largest in Southeast Asia. 

There are 101 million bank accounts at the country’s 120 commercial banks, according to data from the Deposit Insurance Agency (LPS).

Banks’ 12-month deposit rates range from 3.3 percent to 6.75 percent among 21 biggest Indonesian lenders listed in Kontan newspaper. CIMB Niaga sets its rate at 6.75 for 12-month time deposits, while Bank Mayora, a small commercial lender, has the highest deposit rate, at 7 percent.

“BI should ban banks from offering deposit rate above the guarantee rate by the LPS,” Gatot said on Dec. 1. 

LPS guarantees rupiah-denominated bank deposits for accounts of up to Rp 2 billion in funds and sets the maximum deposit rates given by bank at 6.5 percent. 

Any account and deposit rate above that limit will not be guaranteed by LPS. 

Jahja Setiaatmadja, BCA’s president director, said the call to lower lending rates “cannot be done overnight.”
 
Credit-rating agency Fitch Ratings this month upgraded eight Indonesian banks’ long-term credit rating, in step with its upgrade of the nation’s sovereign debt to investment grade. It last had an investment grade rating in 1997, the year of the start of East Asia’s financial crisis.