September 27, 2012
Banks in Indonesia, Philippines flourish Both nations are underbanked and have strong economic outlooks NEW YORK (MarketWatch) — Buoyed by an economic boom, Indonesia’s consumers are voracious and local banks are reaping the benefits. Like its neighbor the Philippines, Indonesia is experiencing strong economic growth that has allowed millions of people to join the middle class and acquire its trappings, such as mortgages, cars and credit cards. The two countries, which occupy thousands of islands in Southeast Asia, share characteristics such as their growing middle classes that point to long-term growth potential for local banks. Their economies are poised to expand at a robust pace largely thanks to resilient domestic consumption. Both nations are also underbanked, with low loan-to-GDP ratios. The International Monetary Fund expects real gross domestic product in the Philippines to grow 4.2% this year and 4.7% in 2013. As for Indonesia, the IMF expects the country’s GDP to expand by 6.1% this year and 6.6% in 2013.
Reuters : Customers stand as they wait their turn at the head office of Mandiri Bank in Jakarta, Indonesia.
Still, Indonesia and the Philippines face challenges, including sustaining political stability, tackling widespread corruption and improving their poor infrastructure. And the Philippines depends heavily on remittances, or money sent home from Filipinos working overseas.
With a population of 232 million and plentiful natural resources such as crude oil and natural gas, Indonesia is Southeast Asia’s largest economy and is much bigger than the Philippines. “I was just in Indonesia and I was amazed how confident people are and their willingness to spend money,” said Shaun Levine, an analyst at political-risk consultancy Eurasia Group. “The central bank has taken various measures to slow the growth of credit, especially consumer loans. [But] this hasn’t really slowed down the Indonesian consumer.”
Indonesia, Philippines come of age Southeast Asia's two most populous nations are well placed to lead the region’s growth for several years to come, as traditional Asian heavyweights China and India lose some momentum. • Global investors key into Indonesia, Philippines • Banks in Indonesia, Philippines flourish • Tourism key to unlocking Philippines future • Wanted in Indonesia: entrepreneurs • A flavor of Indonesia (Slide show) • Full coverage: New Tigers Asia • The New Tigers: Europe | Latin America “Some of the banks are reporting incredible profit margins and a lot of this is on the back of consumer-driven loans,” Levine noted. Stephan Hasjim, an analyst at Nomura, described the Indonesian banking sector as “very healthy,” pointing to average net interest margins of around 6%, nonperforming-loan ratios of below 3% and very high return on equity. “A significant portion of banking assets in Indonesia is foreign owned,” Hasjim noted. “This is a legacy of the massive banking-sector bailout post the 1998 Asian financial crisis and the subsequent privatization to enable the government to recoup part of the bank-sector recapitalization costs.”
There are more than 100 commercial banks in Indonesia, but 15 to 20 of them can be considered large. Bank Mandiri ID:BMRI 0.00% is the biggest bank, followed by Bank Rakyat Indonesia ID:BBRI +0.68% , Bank Central Asia ID:BBCA +0.64% and Bank Negara Indonesia ID:BBNI -0.65% . All except Bank Central Asia are government-controlled; BCA is owned by an Indonesian business group. The next two banks in terms of size, Bank CIMB Niaga ID:BNGA 0.00% and Bank Danamon Indonesia ID:BDMN +0.82% , are owned by Malaysia’s CIMB Group and Singapore’s sovereign-wealth fund Temasek, respectively. Bank Mandiri, in which the government has a 60% stake, is Citigroup’s top stock pick among Indonesian banks. It “has been delivering the strongest revenue and profit growth among peers, supported by rising [net interest margins], strong fee income growth and stable cost to income and credit costs,” Citigroup analyst Salman Ali wrote in a recent research report. The analyst has a positive view on Indonesian banks due to the strong macroeconomic outlook, though he noted short-term concerns tied to declining commodity prices and the policy response to the growing current account deficit. Citigroup expects a gradual slowdown in industry loan growth from the current 26% to 23% by December this year and 18% by December 2013. As in Indonesia, banks in the Philippines, which has a population of around 95 million, are bolstered by a robust macroeconomic backdrop, but they also face challenges. “At the operational level, loan growth appears mired in the midteens as banks continue to adjust lending direction,” Nomura strategists wrote in a July report. Philippine banks also have lower net interest margins — a measure of the difference between banks’ interest income and their cost of borrowing funds — than Indonesian lenders. This and other structural issues mean that Philippine banks’ returns on equity are half of those of similarly-leveraged Indonesian banks, according to the Nomura report. BDO Unibank Inc. PH:BDO +2.09% was the biggest bank in the Philippines by total deposits and assets under management as of the end of 2011, according to its annual report. A full-service universal bank, BDO is a subsidiary of SM Investments Corp., a conglomerate owned by Chinese-Filipino tycoon Henry Sy. The bank’s profit rose 15% in the first half of 2012 from the same period a year ago. Other major Philippine banks include Metropolitan Bank & Trust Co. PH:MBT +0.76% and Bank of the Philippine Islands, or BPI PH:BPI +1.01% .
“BPI is our recommended core holding for its combination of strong management, growth upside and defensive attributes,” Nomura said. BDO Unibank offers investors the broadest exposure to the Philippine financial sector, but its profitability is the weakest, according to Nomura, which has a reduce rating on the bank. “Metro’s turnaround story is convincing, but appears priced in barring a sharp pickup in sector-lagging loan growth,” said Nomura regarding Metropolitan Bank. It has a neutral rating on the stock.