Based on central bank regulation No. 14/26/PBI/2012, branch openings would have to comply with tier I capital, depending on the type of branch and zoning. By 2016, commercial banks incompliance with tier I capital would not be allowed to expand. Exempted from this regulation are regionally owned government banks with new branch openings within the respective locations of their headquarters. Exemption would also apply for functional banks engaging in specific activities (loans to micro and small enterprises).
Exhibit 2 displays 5 types of branches: full, regional, sub, functional and cash-outlet, which are required to have a different minimum tier I capital (ranging from Rp 1–10 billion [US$103,274–$1.03 million]) according to bank category (1-4). Banks under category 3 and 4 with tier I capital of Rp 5-30 trillion and more than Rp 30 trillion respectively have higher required tier I capital in order to carry out their respective branch openings (full & regional: Rp 10 billion; sub & functional: Rp 4 billion; cash-outlet: Rp 2 billion).
On top of branch type, branch location is distinguished into six zones (exhibit 3) with each zone having different coefficient in determining the required tier I capital. Higher coefficient of 5 would be applied in zone 1 with subsequently lower coefficients applied to higher zones. This translates to higher capital requirements for opening new branches in lower zones. Additionally, banks are required to open one branch in zone 5 and 6 (under penetrated areas e.g. West Sumatra, West Kalimantan and West Sulawesi) for every additional three branches in zone 1 (covering Jakarta & overseas) and/or zone 2 (Java & Bali).
Note the openings of overseas branches in Asia are only applicable to banks falling under category 3 and 4 while banks in category 1 and 2 are required to focus on their respective operations in Indonesia. This new regulation has created limited space for some banks to expand their presence going forward. As consequence, we will see a slow-down in 2013 branch openings, triggering capital raising over the longer-term to enhance banks’ capital in compliance with this new multiple licensing regulation.
We believe branch opening regulation is created to improve banks’ operating efficiencies through geographical diversifications while preventing over-crowded conditions in lower zones and concurrently incentivize banks to meet their minimum SME loan exposures (up to 20 percent of total loans) by 2016. Amongst the 10 banks under our coverage, our back-of-the-envelope calculation indicates that there will be massive potential capital raisings, particularly for mid-cap banks, due to this upcoming regulation.
Hence, we remain in favor of big banks with strong capital base to continue expanding their network and, to some extent, regional banks that may be able to take advantage of the above-mentioned exemption from this new regulation. Thus, we maintain sector Neutral with Bank Mandiri and Bank Negara Indonesia as our top picks.
The writer is associate director/deputy head of research at PT Bahana Securities.
source : the jakarta post
The writer is associate director/deputy head of research at PT Bahana Securities.
source : the jakarta post
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