BANKING - Malaysian lenders in Indonesia face margin squeeze

PETALING JAYA: While the long-term growth prospects of Malaysian lenders' operations in Indonesia remain intact, thanks to the low banking penetration there, the risk of margin squeeze prevails for now largely due to intense competition and further rate hikes. (source)



CIMB Group Holdings has one of the largest exposure to Indonesia among local banks, via PT Bank CIMB Niaga Tbk (CIMB Niaga), its 97.9%-owned unit, while Malayan Banking Bhd (Maybank) owns a 97.5% stake in Bank Internasional Indonesia (BII).

CIMB's early entry into the market in 2003 has given it a current Indonesian contribution of 35% to its group's pre-tax profit compared with Maybank, which went into the market much later and has a current exposure of less than 5%, according to OSK Research.

In a banking sector report issued yesterday, the research house analysed both banks and said while Indonesia remained a compelling growth driver, there were three areas of concern that banks with operations there could be faced with, namely asset quality, loans growth and net interest margins (NIMs).

“CIMB Niaga and BII may be hit by renewed concerns of inflationary pressure and aggressive interest rate hikes in Indonesia that may dampen loans growth and asset quality,” OSK said in its report.

Furthermore, the intense competition on lending yields was likely to cap any potential benefits from a rising interest rate environment, it said.

Indonesia's inflation rose to 6.96% last year from 2.78% a year ago on escalating food prices, pressuring the government to raise interest rates to the current 6.75% to curb rapid growth and rising prices.

AmResearch, which issued a report on CIMB Niaga yesterday, said it believed the main concern with CIMB Niaga was still a possible NIM compression.

Following Indonesia's latest hike in its interest rate to 6.75% on Feb 4, fixed deposit rates were also hiked. However, according to AmResearch, CIMB Niaga had for now maintained its lending and deposit rates.

“In the event that deposit rates are increased, CIMB Niaga foresees a six-month compression impact to the NIM, as deposit rates will have to be re-priced upwards immediately,” AmResearch said.

OSK pointed out that CIMB Niaga's focus on the more affluent market segments had enabled the group to sustain NIMs that were superior at 6.46% against the industry's 5.70%.

The NIM measures the difference between interest income generated on loans and interest paid to depositors and is one of the key benchmarks to measure a bank's financial performance.

CIMB Niaga, which is Indonesia's fifth largest bank, made 2.548 trillion rupiah (RM874mil) last year.
Its parent company, CIMB Group, will report its full-year results before end-February.

Source : http://biz.thestar.com.my/news/story.asp?file=/2011/2/19/business/8094382&sec=business  - Feb 19, 2011