Singapore driving Indonesian banking expansion

Singapore has long been considered the epicentre of wealth management and financial services for Asia, and to a greater extent the globe. However an up and coming South East Asian country is quickly catching up to the diminutively sized island nation to become a financial powerhouse in the region…

Indonesia.

Compelled by an emergent middle class, increased productivity, stimulatory government policies and higher domestic consumption, Indonesian economic growth is predicted to exceed seven percent by 2014, irrespective of negative global economic headwinds.

This robust growth may be from a lower base given the protracted ten year recovery the country underwent following the Asian Financial Crisis of 1997, however domestic demand and burgeoning consumer confidence across the cosmopolitan archipelago has pushed the local banking sector to quickly modernise in order to keep pace with the economy as a whole.

Ratings house Moody's has provided a stable outlook for the Indonesian banking system for the next 18 months, expected to achieve decreasing lending expenses, solid GDP and credit growth.

In the fourth most populous country in the world, home to nearly 250 million people and growing at over 1.04%, Singaporean bankers are taking advantage of the startling revelation that more than half of all Indonesians do not possess a bank account.

Such a vast, under-banked population is an ideal opportunity for well capitalised Singaporean banks to target, motivated by lending and deposit book growth and diversification aspirations.

Lending growth is set to top 13 percent in Indonesia by 2014, contrasted with growth of closer to 9 percent in Singapore. Singapore’s banks are excellently placed to maintain and even ratchet up their own credit growth by expanding into the prime banking environment of Indonesia.

By all means Singapore has not stood by while this transformation has taken place, and is in fact impeccably positioned to drive banking innovation, expansion and consolidate stability within its neighbouring banking industry through direct acquisitions or subsidiary activity.

Singapore provides technology and innovation necessities, along with invaluable experience and inter-connectedness with global banking support and liquidity via their existing customer relationships.

A new Indonesian government economic master plan is set to generate $160 billion worth of infrastructure and development proposals. This outlay cannot be supported without private sector and international investment as it stands, and Singapore again is the ideal counter party for business banking requirements, trade finance, equipment and asset financing to this end.

Singaporean banks such as OCBC, UOB and DBS must offer competitive finance and banking solutions to counter expansionary moves undertaken in the region by other overseas banks such as RBS, Citibank, Standard Chartered, Maybank, CIMB, CBA and ANZ.

UOB, the smallest of Singapore’s big three banking groups, has been at the forefront of Indonesian banking expansion as evidenced by its acquisition of a controlling stake in PT Bank Buana (now PT UOB Indonesia).

Streamlining its international operations has been spearheaded by the investment of US$500 million in a regional IT banking program that standardizes the banks high levels of customer service across international borders.

A significant and growing proportion of UOB’s lending and profit growth is devoted solely to Indonesia along with ambitions to double profit and lending growth from its projects abroad.

The focus is not one way though, as a growing chorus of Indonesian banks endeavour to compete internationally, more specifically with Singapore’s own established, mature banking sector itself. Bank Indonesia and BDMN has made concerted efforts to penetrate the strong lending market in Singapore, illustrating the rising power and confidence Indonesian banks are exerting in the region.

Based on a return on equity measure, Indonesian banks in fact prove to be the most profitable in the world. ROE is currently close to 22 percent and growing, however the rate of growth is affected by technology and productivity gaps that Indonesian lenders must currently overcome.

Foreign direct investment has been inhibited by limitations on Indonesian bank ownership, requiring more than 60 percent domestic ownership. Fortunately the sector comprises over 117 private banks and four state owned banks that have focused on stability through deposit growth, but seek technology and innovation direction to advance further.

Nationalistically motivated barriers to entry could prove counter intuitive in the long run if Indonesia is committed to ameliorating its banking, finance and wealth management industry.

While Singapores’ well capitalised and modernised banks are in a perfect position to make acquisitions and ultimately cater to Indonesia’s growing banking population, a tyranny of distance applies to the coverage of 6,000 inhabited islands and predominantly rural based population.

This issue has been the reason behind the higher deposit funding to debt ratio and costlier loan provision, as most Indonesian credit activity is limited to micro lending and smaller scale projects.

Purported changes to the low loan-to-GDP ratio are expected to improve liquidity and business activity on the whole, however the government’s new multiple licence policy requiring 20 percent of credit to be devoted to SME’s (Small and Medium Enterprises) could have a manipulative effect on lending activity.

Well-structured regional IT strategies implemented by banks such as UOB to overcome these impediments from a low cost base are essential to future banking expansion success in Indonesia.