Amidst COVID-19 Pandemic: Indonesian Commercial Banks

INDUSTRY.co.id - February 2020, the impacts of the COVID-19 were slowly giving signals of things to come. 5.93% loan growth had hit a record low in more than a decade (OJK). Along with various sectors of the economy being hit hard due to the pandemic, the Indonesian banking sector faces a tough challenge with severe crash of the stock market, declining credit demand, rising bad-debt and what all businesses are, lacking, capital.

In a short time-frame of just one month (25, February - 24, March), the Jakarta stock exchange fell by 32.2%, recovering 13% as of early July. Consequently, large commercial banks such as Bank BCA experienced a severe decline in their stock prices of near negative 30% in the corresponding time-frame, whereas other state-owned banks such as Bank BRI, Bank Mandiri and Bank BNI’s stock plunged 46%, 50% and 60% respectively (Yahoo Finance). As of early July, bank BCA has almost regained its pre-crisis value. The others, however, still remain negative 30% the pre-crisis value, twice more sensitive than the Jakarta stock index as a whole.

What are some of the underlying rationale for the relationship between the real-sector, banking and the capital market?

First, due to the pandemic, economic activities had been slowed down, resulting in a significant drop in GDP. Consumption, savings, investment and spread of export - import are all at a lower level due to lack of demand, resulting in economic contraction. Most evidently, this can be seen in the loan lending as the demand for loans are declining despite the government and central bank’s effort to reenergise by decreasing the interest rate. As the primary activity of banks, loan growth is a determining factor to profitability.

Second, as businesses fall short to be profitable due to demand crash, the non-performing loans (NPL) are increasing. NPL which indicates the percentage of bad loan or default loan from the total loan, is an essential indicator for the banks’ profitability as well as operational efficiency. The increasing NPL coupled with the decreasing Loan growth plus lower interest rate is a heavy damage on the profitability, expressed by net profit margin (NIM) of the banks.

The pandemic has forced banks to chip away their core capital to amend for the losses. Thanks to the risk resilience, mainly high capital asset ratio (CAR), the damages are maintained. CAR which serves as a capital buffer is a resilient feature against systematic risk. With the economic slowdown as of now, large commercial banks in particular must stay resilient to minimise the risks by adequately managing their CAR as well as steadily maintaining their profitability. Most importantly, bank resilience is crucial as their failure would be disastrous to the economy as a whole.