Sumber: Istimewa
The economic cycle experienced by the banking industry is changing rapidly. Two years post the COVID-19 pandemic, banks’ owners enjoyed dividend parties in 2023 and 2024. Now, bankers must keep brainstorming to ensure their banks’ owners can enjoy increased dividends after closing 2024.
To keep bank shareholders smiling broadly, bankers must boost profits and their bank’s stock prices. For the owners, profit growth will increase dividend income. A rise in stock prices will enhance the owners’ wealth as valuations increase.
First, liquidity conditions remain tight, accompanied by rising interest costs, which will pressure net interest income. As of April 2024, interest expenses increased by 21.77% year-onyear, also pressing net interest income growth to just 2.97%. The net interest margin (NIM), whose trend is upwards from 4.51% in 2021 to 4.71% in 2022 and 4.81% in 2023, began to decline again to 4.56% as of April 2024. Efforts by banks to boost non-interest income to support earnings when credit expansion cannot be aggressively pursued did not significantly impact profitability. This is because non-interest operating income grew only by 7.27%, lagging behind the rise in non-interest operating expenses, which reached 8.43%.
Second, the decline in credit quality, as indicated by the increase in loans at risk (LAR) from 10.04% as of December 2023 to 11.04% as of April 2024. At the same time, non-performing loans also increased, as seen from the non-performing loan (NPL) ratio rising from 2.19% as of December 2023 to 2.33% as of April 2024. Bankers have also buckled up, with credit impairment loss reserves (CKPN), which decreased by Rp16.48 trillion throughout 2023 to Rp342.39 trillion, increasing by Rp4.37 trillion in the first four months of April 2024 to Rp346.77 trillion.
The increase in interest expenses and the decline in credit quality is a “lethal” combination that halts the growth momentum of a banking business that relies on net interest income. Bank profits as of April contracted by 0.47% year-on-year. Several major banks have already announced their financial performance for June 2024, marked by a slowdown in profit growth.
In fact, the profit of Bank Rakyat Indonesia (BRI) – consolidation, stagnated, growing only 1.13% to Rp29.89 trillion. Net interest income grew by 6.69% to Rp69.93 trillion but was pressured by asset impairment charges, which soared by 52.28% to Rp21.35 trillion due to a rise in non-performing loans (NPLs) to 3.21%. BRI’s loans grew by 11.20% to Rp1,336.78 trillion, with about 82% flowing into the micro, small, and medium enterprise (MSME) sector.
Meanwhile, since the end of 2023, the liquidity and profitability indices of MSMEs have declined, impacting BRI’s performance. On an industry level, MSME loan growth as of April 2024 was only 7.30%, far below the aggregate credit growth of 13.09%, while corporate loans grew by 18.45%.
Therefore, Bank Central Asia (BCA), with 45% of its credit portfolio in the corporate sector, enjoyed profit growth of 11.10% to Rp26.90 trillion as of June 2024 year-on-year. BCA’s loans grew by 15.48% to Rp849.69 trillion, supported by 19.90% growth in the corporate credit segment to Rp388.6 trillion, a 7.9% increase in commercial loans to Rp127.8 trillion, and a 12.70% rise in SME loans to Rp114.4 trillion.
According to Jahja Setiaatmadja, President Director of BCA, BCA’s profit growth is supported by quality financing expansion, as well as increased transaction volume and funding. “Business loans grew solidly in both the corporate and SME segments. There was also an increase in the consumer credit segment, supported by the BCA Expoversary 2024 event,” he said in a press conference, as quoted by Infobanknews.com, Wednesday, July 24, 2024.
As of this writing on July 25, other banks have not yet published their financial performance for the first half of 2024. One of them is Bank Mandiri, the largest bank in the country. However, since Bank Mandiri has competence in the corporate segment, which is growing industry-wide, it has the potential to record profit growth this year. Moreover, as of May 2024, the bank recorded 20% loan growth with an NPL below 1%.
When contacted by Infobank, Darmawan Junaidi, President Director of Bank Mandiri, was quite optimistic. “Bank Mandiri’s performance can be managed very well by continuously increasing market share from both the credit business and third-party funds, especially low-cost funds with a very good ratio,” he said when contacted by Infobank last month.
However, the dividend party is expected to continue. Although there will be a slowdown, even stagnation, in profit growth, top banks generally have strong resilience in facing uncertainties until the end of 2024 and are still bold enough to distribute dividend payout ratios of over 60%. The banking industry’s aggregate dividend payout ratio has continued to increase from 37% in 2017 to 54% in 2021, 61.76% in 2023, and 59.40% in 2024.
For instance, BRI, which distributed dividends of up to Rp48 trillion this year from the Rp60.43 trillion profit recorded in 2023. “Even if BRI’s profit does not grow this year, shareholders can still enjoy a dividend of Rp48 trillion if the dividend payout ratio remains the same as before,” said Sunarso, President Director of BRI, to editors some time ago.
As the most profitable bank until last year, BRI became the bank that distributed the largest dividends with a dividend payout ratio of 79.61%. Although its portion dropped from the previous year’s dividend payout ratio of 84.61%, the dividend amount increased because in 2023, BRI distributed Rp43.49 trillion in dividends from a profit of Rp51.41 trillion in 2022. The government, through the Ministry of State-Owned Enterprises (BUMN), which owns 53.19% of BRI’s shares, also made Rp25.51 trillion this year.
The second-largest dividend was enjoyed by the Djarum Group, the owner of Bank Central Asia (BCA). This largest private bank issued dividends of Rp33.28 trillion, or 68.40% of the 2023 profit, which reached Rp48.66 trillion. Next is Bank Mandiri, which paid dividends of Rp33.04 trillion, or 55.01% of the 2023 profit, which reached Rp60.05 trillion.
Meanwhile, Bank Negara Indonesia (BNI) distributed dividends of Rp10.45 trillion, or 49.53% of the 2023 profit, which was Rp21.10 trillion. Then, Bank CIMB Niaga spread dividends of Rp3.84 trillion, or 47.08% of the 2023 profit, which was Rp6.55 trillion. Despite Bank Mega’s profit dropping by 13.37% to Rp3.51 trillion in 2023, the bank owned by Chairul Tandjung still used 70% of its profit for dividends.
According to Infobank Research Bureau data for 2023, 71 commercial banks enjoyed profit growth, 34 banks recorded a profit decline, and 8 banks suffered losses. In aggregate, the banking industry’s profit throughout 2023 grew by 20.57% to Rp243.33 trillion amid the pressure of interest expenses skyrocketing by 44.28% to Rp296.58 trillion, resulting in net interest income increasing by only 9.16% to Rp607.73 trillion. This is lower than the net interest income growth of 14.20% in 2022, which reached Rp557.14 trillion.
However, the continuous reduction in restructured loans from Rp741.09 trillion in 2022 to Rp564.46 trillion has reduced the loan at risk (LAR) from 13.87% to 10.04%. As a result, many banks could break the “piggy bank” that had been reserved too large in previous years due to fears of non-performing loans (NPLs), especially during the COVID-19 pandemic.
Due to the soaring profits, bank owners are again celebrating because they can receive thicker earnings from their banks’ increasing profits. Shareholders of 19 public banks enjoyed dividends of Rp139.74 trillion, up from the previous year’s Rp114.52 trillion.
The dilemma lies with the owners of lower-tier banks, especially those with low profitability due to small business scale and thin capital adequacy ratios. Shareholders who want their banks to grow will not take dividends to support better performance growth. Hence, out of 47 public banks, only 19 banks distributed dividends to shareholders this year.
Maintaining capital strength is crucial for banks to face economic cycles. Capital is also increasingly important in the digital era to ensure banks can build technological infrastructure to remain competitive. According to the Infobank Research Bureau, there are 62 banks in KBMI-1 with capital of less than Rp6 trillion, which must compete in increasingly tight competition due to the hegemony of giant banks. Although they have met the minimum core capital requirement of Rp 3 trillion in 2022, capital strengthening must continue to support business growth.
The next challenge is how to make capital and assets productive. According to the Infobank Research Bureau study titled “Rating 105 Banks Infobank Version 2024,” the business base of banks affects their profitability. In 2023, 73 banks had assets of less than Rp50 trillion. Their profitability, reflected in the average return on equity (ROE), was only 5.11%, and the return on assets (ROA) was only 1.15%. Compare this with 32 banks with assets above Rp50 trillion, which had an average ROE of 9.56% and an ROA of 1.82%. Without considering the negative profitability of KB Bank last year, the ROE and ROA of the 31 largest banks reached 11.85% and 2.13%. This indicator is clarified by the profitability of 21 banks with assets above Rp100 trillion, which had an average ROE of 12.62% and an ROA of 2.26%.
The lower profitability of lower-tier banks is influenced by their competitiveness, especially in attracting third-party funds. As a result, the capital of lower-tier banks, such as the 62 banks in KBMI-1, becomes less productive because they have an average CAR as high as 43.89%. Last year, the credit of banks in this group grew by only 9.43%, partly due to tight liquidity, with an average loan to deposit ratio (LDR) of 103.29%, for example, the LDR of private banks heating up, such as Krom Bank at 527.91%, Bank Amar Indonesia at 373.61%, Super Bank Indonesia at 316.89%, and Bank Sinhan Indonesia at 145.13%.
The lower profitability of lower-tier banks is influenced by their competitiveness, especially in attracting third-party funds. As a result, the capital of lower-tier banks, such as the 62 banks in KBMI-1, becomes less productive because they have an average CAR as high as 43.89%. Last year, the credit of banks in this group grew by only 9.43%, partly due to tight liquidity, with an average loan to deposit ratio (LDR) of 103.29%, for example, the LDR of private banks heating up, such as Krom Bank at 527.91%, Bank Amar Indonesia at 373.61%, Super Bank Indonesia at 316.89%, and Bank Sinhan Indonesia at 145.13%.
These indicators prove that the business scale greatly affects the competitiveness and profitability of banks. Currently, credit that generates interest income is still the main revenue engine for banks. However, like the last few years and in the future, the banking NIM may experience a downward trend due to open market competition and rising interest expenses when interest rates are high, so banks must strive to increase the role of commission-based income to maintain revenue growth. Banks that rely solely on net interest income must be cautious as their profitability can be directly pressured when their credit quality is shadowed by rising non-performing loans, as seen in 2024.
To keep bank shareholders smiling broadly, bankers must boost profits and their bank’s stock prices. For the owners, profit growth will increase dividend income. A rise in stock prices will enhance the owners’ wealth as valuations increase.
