Indonesia Banking Sector Report — Q3 2024

Macro and policy: one cut, then a pause for the rupiah

Bank Indonesia's Board of Governors lowered the BI-Rate by 25bp to 6.00% at its meeting on 17-18 September 2024, and cut the Deposit Facility and Lending Facility rates by the same amount to 5.25% and 6.75%. The Board said the decision was consistent with low and stable inflation projected within the 2.5±1% target corridor for 2024 and 2025, rupiah stability and appreciation, and the need to strengthen growth. It held all three rates at its meetings on 15-16 October and 19-20 November 2024. In October it said the near-term focus of monetary policy was rupiah stability amid increasing global financial market uncertainty. In November it tied that focus to geopolitical and global economic uncertainty given political developments in the United States.

The currency swung in both directions. The Financial System Stability Committee (KSSK) reported that the rupiah strengthened to Rp15,140 per US dollar at the end of September 2024, up 2.08% on the month. By 19 November 2024 it had depreciated 0.84% on the previous month and stood 2.74% weaker than at the end of December 2023. Portfolio investment recorded a net outflow of USD1.9bn in November 2024, as of 18 November, after a net inflow of USD1.1bn in October. Foreign reserves were USD151.2bn at the end of October 2024, equivalent to 6.6 months of imports.

Bank Indonesia reported economic growth of 4.95% year on year in the third quarter of 2024, underpinned by household consumption and investment, and projected 2024 growth in a 4.7-5.5% range. In October the KSSK forecast growth of 5.1% for 2024 and 5.2% for 2025. Inflation remained below the midpoint of the target corridor: CPI inflation was 1.84% in September 2024 and 1.71% in October 2024, with core inflation at 2.09% and 2.21%. During the third quarter of 2024 the benchmark 10-year government bond yield fell 60bp to 6.43%, and non-residents recorded net inflows of Rp62.49tn into government securities.

Fiscal policy also targeted housing. The government raised its VAT relief on housing from 50% to 100% for September to December 2024 and raised the FLPP subsidised mortgage quota for low-income households from 166 thousand to 200 thousand units.

Lending and funding: growth narrows to corporates

Bank credit grew 10.85% year on year in September 2024 to Rp7,579.25tn, according to the Financial Services Authority (OJK), down from 11.40% in August 2024. Growth was 12.36% in June 2024 and 12.40% in July 2024. The slowdown between June and September was 1.51 percentage points. Bank Indonesia reported a slight pick-up to 10.92% in October 2024.

By use, investment credit grew 12.26% in September 2024, consumer credit 10.88% and working capital credit 10.01%. State-owned banks were the main driver, with credit growth of 12.80%. Corporate credit grew 15.43%, while MSME credit grew 5.04%, a gap of 10.39 percentage points. Bank Indonesia reported sharia financing growth of 11.37% in September 2024. Corporate credit growth had been 17.51% in June 2024 and 18.06% in July 2024.

Funding has not kept pace. Third-party funds grew 7.04% year on year in September 2024 to Rp8,720.78tn, with current accounts up 9.38%, savings 7.30% and time deposits 4.95%. In June 2024 deposits had grown 8.45% to Rp8,722.03tn, so the stock was Rp1.25tn lower at the end of September than at the end of June. Over the same period credit rose by about Rp100.85tn. Credit was equal to about 86.9% of third-party funds in September 2024, against about 85.7% in June 2024.

Bank Indonesia has continued to disburse its Macroprudential Liquidity Incentive (KLM) to banks. By the end of October 2024 it had disbursed Rp259tn, of which Rp120.9tn went to state-owned banks, Rp110.9tn to national private banks, Rp24.7tn to regional government banks and Rp2.6tn to foreign bank branches. Its banking survey for the third quarter of 2024 showed positive growth of new loan disbursements, with a weighted net balance of 80.6%, and respondents expected it to rise to 88.3% in the fourth quarter of 2024. Respondents also expected slightly tighter lending standards in the fourth quarter of 2024, with a Lending Standards Index of 2.2%. Banks therefore expected to lend more in the final quarter while applying somewhat stricter criteria.

Indonesian banking system indicators, June and September 2024

Source: Otoritas Jasa Keuangan (OJK), Stabilitas Sektor Jasa Keuangan yang Terjaga dan Kinerja Intermediasi yang Kuat Sebagai Daya Dukung Perekonomian Nasional, 5 August 2024; Otoritas Jasa Keuangan (OJK), Stabilitas Sektor Jasa Keuangan Terjaga di Tengah Meningkatnya Risiko Geopolitik, 1 November 2024.

Asset quality: back towards pre-pandemic levels

The gross NPL ratio fell to 2.21% in September 2024 from 2.26% in August 2024, and the net NPL ratio was unchanged at 0.78%. Loan at risk declined to 10.11%, close to the 9.93% recorded in December 2019, before the pandemic. In June 2024 the gross NPL ratio had been 2.26% and loan at risk 10.51%, so loan at risk fell by 0.40 percentage points over the quarter.

Small-business credit remains the weaker segment. The gross NPL ratio on MSME loans was 4.04% in June 2024, and MSME loan at risk was 13.50%. Bank-level results show the same pattern. BRI, whose lending is concentrated on MSMEs, reported an NPL ratio of 2.90% in the third quarter of 2024 and loan at risk of 11.66%, down from 13.80% a year earlier. Bank Mandiri's bank-only NPL ratio was 0.97%, down 39 basis points on the year. BCA's NPL ratio was 2.1% and its loan at risk 6.1%, against 7.9% a year earlier.

Bank buy-now-pay-later lending is small but growing fast. Banks' buy-now-pay-later loans grew 46.42% year on year in September 2024 to Rp19.81tn across 19.82 million accounts, although they were only 0.26% of bank credit.

Capital and liquidity: ample buffers

The banking system's capital adequacy ratio rose to 26.85% in September 2024 from 26.69% in August 2024. That was 0.67 percentage points above the June 2024 level of 26.18%. Bank Indonesia kept the countercyclical capital buffer at 0% in October 2024. At bank level, BRI reported a capital adequacy ratio of 26.76% at the end of September 2024, and BCA a bank-only CAR of 29.3%.

Liquidity indicators were comfortably above regulatory thresholds. In September 2024 the ratio of liquid assets to non-core deposits was 112.66% and of liquid assets to third-party funds 25.40%, against thresholds of 50% and 10%. The liquidity coverage ratio was 222.64% and the net stable funding ratio 129.50%. Bank Indonesia reported the liquid assets to third-party funds ratio at 25.58% in October 2024.

Bank Indonesia kept its macroprudential liquidity buffer at 5%, with 5% repo flexibility, and the Sharia buffer at 3.5%. It also kept the macroprudential intermediation ratio range at 84-94%, and maintained loan-to-value ratios on property loans of up to 100% and a minimum down payment on vehicle loans of 0%, effective from 1 January to 31 December 2025. The Deposit Insurance Corporation (LPS) kept its guarantee rate at 4.25% for rupiah deposits at commercial banks and 6.75% at rural banks in its September 2024 setting. LPS fully covered the deposits of 99.94% of commercial bank accounts at the end of August 2024.

Policy and prudential settings

Source: Bank Indonesia, BI-Rate Lowered 25bps to 6.00%: Maintaining Stability, Strengthening Economic Growth, 18 September 2024; Bank Indonesia, BI-Rate Held at 6.00%: Maintaining Stability, Strengthening Economic Growth, 16 October 2024; Bank Indonesia, BI-Rate Held at 6.00%: Maintaining Stability, Strengthening Economic Growth, 20 November 2024; Komite Stabilitas Sistem Keuangan (KSSK), Stabilitas Sistem Keuangan Tetap Terjaga di Tengah Dinamika Geopolitik Global dan Arah Pelonggaran Kebijakan Moneter, 18 October 2024.

Profitability: margins narrow, returns hold

Return on assets for the banking system rose to 2.73% in September 2024 from 2.69% in August 2024. Margins have narrowed: OJK said the net interest margin fell from 4.8% in June 2023 to 4.57% in June 2024 as deposit rates rose while lending rates were broadly flat. Bank Indonesia reported the one-month deposit rate at 4.75% and the lending rate at 9.2% in September 2024, and 4.73% and 9.17% in October 2024. The September cut has yet to pass through clearly to bank pricing.

BRI, Bank Mandiri and BCA reported combined net profit of Rp128.46tn for the first nine months of 2024. BRI earned Rp45.36tn on a consolidated basis, with loans up 8.21% to Rp1,353.36tn, of which 81.70% was MSME lending. Bank Mandiri earned Rp42tn, up 7.56%, as consolidated loans grew 20.8% to Rp1,590tn and corporate loans 29.4% to Rp581tn. BCA earned Rp41.1tn, up 12.8%, with loans up 14.5% to Rp877tn and net interest income up 9.5% to Rp61.1tn.

Funding mix separates the three. BCA's third-party funds grew 3.4% to Rp1,125tn, with current and savings accounts above 82% of the total. Its bank-only loan-to-deposit ratio rose to 75.1% at the end of September 2024 from 67.4% a year earlier, and its bank-only net interest margin was 5.8% and return on equity 24.7% for the first nine months of 2024. BRI's loan-to-deposit ratio was 89.18% and current and savings accounts were 64.17% of its deposits. Bank Mandiri grew consolidated deposits by 14.9%, against loan growth of 20.8%. Banks with deep transaction franchises appear better placed to defend margins as deposit competition persists.

BRI, Bank Mandiri and BCA, results to September 2024

Source: PT Bank Rakyat Indonesia (Persero) Tbk, Perkuat Fundamental Kinerja, BRI Cetak Laba Rp45,36 Triliun, 30 October 2024; PT Bank Mandiri (Persero) Tbk, Dorong Ekonomi Nasional, Bank Mandiri Catat Penyaluran Kredit Rp 1.590 triliun di Kuartal III 2024, 30 October 2024; PT Bank Central Asia Tbk, Solid Credit Growth across Segments, BCA Net Profit Grew 12.8%, 23 October 2024.

Regulation and policy

OJK issued POJK Number 15 of 2024 on the integrity of bank financial reporting, which sets out the responsibilities of directors and commissioners and the support expected from controlling shareholders in producing reliable financial reports. It launched a strengthening roadmap for regional development banks (BPD) for 2024-2027, built on four pillars. The KSSK also reported OJK rules on governance of rural banks, anti-fraud strategy and the transparency of the prime lending rate for conventional commercial banks. OJK said it had asked banks to block more than 8,000 accounts identified by the Ministry of Communication and Digital in its campaign against online gambling.

On 5 November 2024 the President signed Government Regulation (PP) Number 47 of 2024 on the write-off of bad debts owed by micro, small and medium enterprises in agriculture, plantations and livestock, fisheries and marine affairs, and other sectors. The regulation matters most for lenders with large MSME books. Bank Indonesia applied a 0% QRIS merchant discount rate to transactions of up to Rp500,000 at micro merchants from 1 December 2024. It extended its current National Clearing System fees and credit card rules, including a 5% minimum card payment, until 30 June 2025.

Outlook and risks

Bank Indonesia projected credit growth within a 10-12% range for 2024, and its September 2024 Financial Stability Review projected 11-13% for 2025. Bank Mandiri said it expected loan growth within its 16-18% guidance by the end of 2024. The Review listed three challenges for financial stability: a shifting global economic landscape, operational risks from financial digitalisation including cyber threats and fraud, and climate risk.

The near-term risk is external. Bank Indonesia's November statement linked its policy stance to rupiah stability, and portfolio flows reversed into a net outflow in November 2024. A weaker currency would limit room for further rate cuts, and with them any relief on funding costs. Domestic risks sit in the MSME book and in fast-growing consumer products, where the data show higher arrears and rapid growth respectively. Against that, capital and liquidity buffers are large, profitability has held up and the large banks' asset quality has improved.

Primary sources: Bank Indonesia, BI-Rate Held at 6.00%: Maintaining Stability, Strengthening Economic Growth, 20 November 2024; Otoritas Jasa Keuangan (OJK), Stabilitas Sektor Jasa Keuangan Terjaga di Tengah Meningkatnya Risiko Geopolitik, 1 November 2024; Bank Indonesia, BI-Rate Lowered 25bps to 6.00%: Maintaining Stability, Strengthening Economic Growth, 18 September 2024; Otoritas Jasa Keuangan (OJK), Stabilitas Sektor Jasa Keuangan yang Terjaga dan Kinerja Intermediasi yang Kuat Sebagai Daya Dukung Perekonomian Nasional, 5 August 2024; Bank Indonesia, BI-Rate Held at 6.00%: Maintaining Stability, Strengthening Economic Growth, 16 October 2024; Komite Stabilitas Sistem Keuangan (KSSK), Stabilitas Sistem Keuangan Tetap Terjaga di Tengah Dinamika Geopolitik Global dan Arah Pelonggaran Kebijakan Moneter, 18 October 2024; Otoritas Jasa Keuangan (OJK), Sektor Jasa Keuangan Terjaga Stabil Dengan Kinerja Yang Baik di Tengah Ketidakpastian yang Masih Tinggi, 6 September 2024; Bank Indonesia, Banking Survey Quarter III - 2024: Positive Growth of New Loan Disbursements, 21 October 2024; PT Bank Rakyat Indonesia (Persero) Tbk, Perkuat Fundamental Kinerja, BRI Cetak Laba Rp45,36 Triliun, 30 October 2024; PT Bank Mandiri (Persero) Tbk, Dorong Ekonomi Nasional, Bank Mandiri Catat Penyaluran Kredit Rp 1.590 triliun di Kuartal III 2024, 30 October 2024; PT Bank Central Asia Tbk, Solid Credit Growth across Segments, BCA Net Profit Grew 12.8%, 23 October 2024; PT Bank Central Asia Tbk, 9M24 Results, 23 October 2024; Kementerian Sekretariat Negara, Presiden Prabowo Tandatangani PP Tentang Penghapusan Piutang Macet UMKM, 5 November 2024; Bank Indonesia, Stabilitas Sistem Keuangan Terjaga, Transisi Keuangan Hijau Terus Diperkuat, 2 October 2024.