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Executive column: Watch out for rising bad loans:JPMorgan
JPMorgan Chase Bank is one of the oldest foreign banks in Indonesia. Now known as a big player in Indonesia’s treasury business, the US-based investment bank established its presence in 1968 after former president Soeharto’s administration opened up the banking sector to foreign investors. JPMorgan Chase senior country officer for Indonesia, Haryanto T. Budiman, recently discussed his view on the local banking sector with The Jakarta Post’s Satria Sambijantoro.
Question: With 45 years presence here, what are JPMorgan Chase’s major contributions to Indonesia’s economy?
Answer: We are not just here doing treasury transactions only. Of course it [treasury transaction] is an important element of our business, but what’s important is we give balanced support, we give lending to multinational companies.
To local corporations, as you know, we have securities here, we are quite active in the investment banking business.
For clients doing equity capital market, wanting to go for an IPO [initial public offering], wanting to do rights issues, or in the debt capital market for clients that actually want to issue global bonds in US dollars.
In mergers and acquisitions (M&A), whether it is actually domestic M&As, or even cross-border M&A.
We were helping Semen Gresik when it acquired Thang Long Cement in Vietnam. We were advising Semen Gresik in the first acquisition by a state-owned enterprise acquiring company in Vietnam.
And also, five times in a row, we supported Indonesia issuing global bonds totaling US$10.25 billion.
Lately, we’ve seen nationalism-related moves affecting takeovers, notably the failure by Singapore’s DBS Bank in taking over Bank Danamon, or rules to cap foreign ownership in banks and mining companies. Do your clients have concerns on the issue?
[Our clients] always asked that question. When they want to invest in any country, not just Indonesia, they would like to understand the whole regulatory landscape, and also where the regulation is evolving.
So, I think it is our job to really understand and communicate about the regulatory landscape.
For example, in the banking industry, I told the clients, ‘Hey, maximum foreign ownership, if you want to come here, is 40 percent. That’s the maximum you can get. Later on, you can increase it, after five years, to more than 51 percent after you go through the process.’
Actually, some of them basically said: ‘OK, fine we still want to come in at 40 percent’. It’s because they said in some other countries there were also restrictions: you cannot buy more than a certain percentage point.
What is difficult for them to accept is if the regulations keeps changing on a regular basis. That creates uncertainty for them.
Apparently in the Danamon case, if they apply for 40 percent, maybe the whole calculation of synergy and benefits may not be like what they initially planned.
With the Indonesian central bank hiking rates and increasing its minimum reserves requirement, how prepared is JPMorgan Chase to the tighter liquidity regime?
The good thing about us is that our customers are primarily multinational companies that have been with us for quite a while and that have relationship with our head office.
They come to Indonesia, they invest here and they need working capital. So, we provide that kind of facility to them in US dollars or in rupiah. These are primarily good names of multinational companies and pretty much not affected by this kind of economic slowdown.
We have local customers as well. But, we are very selective about the types of local customers that we are banking. It’s because up to now, we are pleased to tell you that our non performing loans are still zero.
We have a pretty good client selections process in place. We only serve the cr?me de la cr?me — the top companies in certain sectors that we are comfortable dealing with.
It won’t affect our JPMorgan business per se, our businesses are still growing, but we are more careful in the banking sector. In natural resources, of course, we are a bit more cautious whether we would go big on coal, something that we are trying to slowdown on ourselves.
How do you think the bold monetary tightening would affect the banking industry as a whole?
Number one, there would be more competition in liability products. It is going to be more expensive for banks to collect deposits. It’s public knowledge: If you go around Jakarta and talk to many different local banks, the time deposit rate is already quite high — even higher than the LPS [Deposit Insurance Corporation] rate.
Why are they doing that? It’s because competition for deposits is tougher. People are basically saying, ‘I want to put my money in your bank if I’m getting a special rate. Otherwise, some other banks already offer me a higher rate’.
If banks actually pay more interests to get deposits, they have to charge more on the loan customers. Otherwise, their net interest margin will get squeezed even faster.
It’s fine and nice, but they probably can do it in certain segments that are a little bit price insensitive compared to other segments.
But, in certain categories of customers, particularly the ex-restructured loan portfolio — it is a performing loan now, but it used to be non-performing loans [NPL] — these types of clients are super sensitive to interest rates because their cash flow is highly dependent on how much interest rates they have to pay for the bank. In particular, in an economic slowdown environment, their top line might be affected as well. They could be facing cash flow problems.
So the worry is about: What will happen to the NPL formation in the whole country? In terms of NPL, I’m less concerned about typical good solid companies, which will not have this issue. They will be fine because particularly slowdown in an economic cycle happens already.
They can expand, they can contract a little bit, they can pay higher a interest rate — maybe they delay their capex [capital expenditure] a little bit.
But the ex-restructured loan portfolio: if economy is slowing down and interest rate increases, there’s a likelihood that this kind of company would be downgraded. That’s the worrying part that people actually have.
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