FACED with a contracting economy at home, Singapore's three local banks are banking on their Indonesian units for growth.
The Indonesia banking sector - with its high net interest margin (NIM), low penetration rate and relatively low defaults - is proving a bonus for DBS Group Holdings, United Overseas Bank and OCBC Bank.
A recent Fitch Rating calculation found that Indonesian banks enjoy a NIM of 6.1 per cent - the highest in the region. And in spite of the crisis, loan growth remains strong. Outstanding loans from Indonesian banks rose 26 per cent in March to 1,305.4 trillion rupiah (S$182 billion), up from 1036.1 trillion rupiah a year ago.
Business banking has been identified as one of the key drivers behind the loan growth in a country where the corporate bond markets remain insignificant. Business demand for loans remains unabated due to improving market sentiment in the past months. The economy has also been tipped to expand at 4.2 per cent, according to the latest Bloomberg news survey in May.
Another area of growth would be retail banking - the penetration rate of 27 per cent remains low relative to other Asian countries.
The low penetration rate - a result of the heavy focus on corporate lending prior to 1999 - leaves much room for expansion in the retail banking sector.
OCBC which acquired Bank NISP - recently renamed Bank OCBC NISP - in 2004 has been focusing on the consumer and small-medium enterprise (SME) segment.
For the first quarter, Bank OCBC NISP reported 398.76 billion rupiah in net interest income for the first quarter, up 31.87 per cent from a year ago. This increase has been attributed to 'growth in consumer loans and loans to small businesses as well as lower cost of funding.'
The company also revealed that the bank's loan portfolio grew 3 per cent over the year.
Likewise, higher net interest income from increased commercial and corporate lending also lifted the bottomline of the United Overseas Bank subsidiary - PT Bank UOB Indonesia. Net profit before tax rose 20.1 per cent to 326.4 billion rupiah in 2008.
Unlike OCBC, UOB has chosen to target the consumer and business segments with separate subsidiaries. PT Bank UOB Indonesia focuses on corporate banking, while PT Bank UOB Buana - UOB's other Indonesian subsidiary - concentrates on consumer banking and SME financing.
For UOB Buana, before tax profits for the first quarter soared 59.19 per cent to 179.32 billion rupiah from 66.67 billion rupiah a year ago.
PT Bank DBS Indonesia - the Indonesian subsidiary of DBS Group Holdings - also posted double digit growth. Net interest income for 2008 increased by 17.9 per cent from 614,941 rupiah to 724,730 rupiah, and net profit before taxes rose 32.8 per cent from 270.549 billion rupiah to 359.299 billion rupiah.
In spite of the crisis, DBSI added three new branches in Jakarta and Medan, bringing its total number of branches and sub-branches in Indonesia to 40, as its overall customer base in Indonesia more than doubled in 2008.
On the decision to expand, Budiman Tanjung, DBSI consumer banking head, said: 'Despite the global economic turmoil, DBSI is confident that the Indonesian economy will continue to grow. Being present in strategic locations allows us to offer more tailor-made banking solutions, for the convenience of our customers.'
Currently, Bank OCBC NISP has the largest network with 369 offices across Indonesia. The offices are located mainly in West Java and Jakarta - which has 132 and 108 offices respectively.
Coming in a close second is UOB Buana which has 35 branches and 170 sub-branches. UOB Indonesia has 10 branches.
One area of concern, though, is non-performing loans (NPLs).
Bank OCBC NISP's net NPL rose marginally from 2.14 to 2.21 per cent over the last quarter, while PT Bank UOB's NPL has held steady at about 3 per cent for 2008.
However, taking into account the banks' rapidly expanding loan portfolio, the rise in NPLs may not be significant.
Beyond business and retail banking, the growing pool of the very rich is another market for their private banking arm.
A study by Capgemini and Merrill Lynch in 2008 shows that the number of high net worth in Indonesia had increased by 16.8 per cent to 23,000 people between 2006 and 2007 - a sizeable market for private banking.