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Industry Overview: Indonesia Banking Industry

The banking industry plays a significant role in the Indonesian financial system. Bank assets account for about 80 per cent of the national assets indicating how bank-dependent this economy is.  Indonesia's banking sector has been a magnet for foreign firms for the past decade as it was allowing local and foreign investors to own up to 99 percent of Indonesian banks. Total assets in the banking industry reached Rp3,700 trillion at the end of 2011, or about 76.1 percent of total assets in the financial services industry, while the total assets of non-banking financial services industry reached only Rp1,165 trillion, or around 23.9 percent of the total assets of the financial services industry.

As of July 2012, the banks recorded a profit of Rp52.89 trillion or up by 24.74 percent from the same period in the previous year, whereas credit disbursed by commercial banks reached Rp2,487.84 trillion or up by 25.33 percent from the previous year. As of August 2011, there were nearly 120 commercial banks, holding assets worth Rp3252.7trn ($390.3bn). About 15 of these banks account for approximately 70% of the nation's credit. Four banks, including three of the top four, are at least partially state-owned. Of the private lenders, 11 are Islamic banks. 8 of Indonesia's top 11 banks by market value are either controlled by foreign banks, business families, private equity firms or wealth funds in one of the region's most open banking sectors.
 
M&A deals in the Indonesian banking sector are likely to increase significantly over the next few years following the 13 July issuance of new bank ownership rules by Indonesia's Central Bank. It has set ownership limits in local banks at a maximum 40 percent, but will allow exemptions that leave open the door. Under the new rule, multi-licenses will replace the single licenses that now allow banks to engage in multiple businesses. Now, only banks with a large amount of core capital will be able to conduct more than one business, a move that could force some smaller banks to raise capital or seek mergers.
 
But this rule does not affect the largest bank acquisition in Indonesia's history, a blazing $7.3 billion deal by DBS Group of Singapore's to acquire 67% stake in Bank Danamon Indonesia, the nation's fifth-largest bank.
 
As the world's largest Muslim country, Indonesia is also a growth market for Islamic finance - lending, saving and investing without the use of interest, speculation or excessive risk. Sharia banking only accounts for a 4.23 percent market share. The growth of this banking sector is set to continue with 30-40% growth per annum expected over the next 3-5 years because of popular demand for sharia banking services in the world's most populous Muslim country. There are currently 11 sharia banks in the country, 24 sharia banking units (part of conventional banks) and 156 sharia-based secondary banks. The total assets of Indonesia's sharia banks increased by 50 percent to Rp 158.8 trillion (US$16.99 billion) as of March 2012, from Rp 101.2 trillion in the same period last year. To boost sharia bank growth, the government is encouraging sharia banking to channel more funds, particularly for small and medium enterprises.
 
The Shariah unit of Bank CIMB Niaga reported earnings more than doubled in the first half in 2012. Profit in the January-June period rose 155 percent to Rp 63 billion. The surge in profit before tax raised return on equities to 21 percent, compared to 14 percent a year earlier. Shariah lenders PT Amanah Finance and PT Al Ijarah Indonesia Finance said loans will grow at least 30 percent per annum in the next few years.  
 
According to Iwan Wisaksana, an analyst at Fitch Ratings Indonesia, "Indonesia's banking sector is currently the best performer in Southeast Asia, especially in profitability."Only around half of Indonesians aged over 15 have bank accounts, leaving an untapped market of around 60 million, thus providing a perfect opportunity for more investments in this sector in the future.
 
(Source: Insight Alpha)
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CIMB Niaga