This article originally appeared in The Jakarta Post.
Indonesia’s banks have been riding a big wave over the past five years, enjoying some of the highest growth in assets and strongest returns in the world. However, the year ahead raises a big question: will the confluence of tougher macro-economic trends and new regulations cause a significant slowdown for the sector, with particular pain for smaller banks?
In the near term, we remain optimistic about the banking sector in 2014 for four reasons. First, even if real gross domestic product (GDP) growth slows to around 5 percent, as some are projecting, it should still result in double-digit growth in the banking sector. Also, higher interest rates will have mixed impacts on bank profitability with the overall effect largely neutral — and return on equity (ROE) should remain attractive.
Meanwhile, non-performing loans are low by historical and international standards. And a final reason for optimism: while new regulations and macro-prudential measures may put the brakes on some near-term growth, their ultimate objectives are primarily aimed at ensuring the stability and sustainability of the banking system. They should not affect the structural growth of the sector.
Although there is a lot of room for different kinds of banks in Indonesia to grow, conditions will likely become more challenging for some of the smaller banks as the larger banks benefit from increasing economies of scale and the lower costs of funds. Slower economic growth and higher interest rates have already begun to highlight the distinctions between different types of banks and the challenges smaller banks face.