Local Banks More Efficient Than Foreign-Owned Banks

The efficiency level of banks owned by domestic investors is higher than banks owned by foreign investors, due to the latter's higher operating cost. IFT Research Department said that local banks profitability ratio is also higher than banks owned by foreign investors.

The IFT Research Department compiled data from three banks owned by local investors, PT Bank Mandiri Tbk (BMRI), PT Bank Rakyat Indonesia (BBRI) and PT Bank Central Asia Tbk (BBCA), and three banks owned by foreign investors, PT Bank CIMB Niaga Tbk (BNGA), PT Bank Internasional Indonesia Tbk (BNII) and PT Bank Permata Tbk (BNLI). It was discovered that local banks are more efficient.

This is evident from the average cost-to-income ratio (BOPO) of the three local banks, which are lower than the foreign-owned banks. In the 2004 to 2010 period, local banks BOPO was at 57 to 73 percent, while banks owned by foreign investors was at 77 to 89 percent.

Average annualized cost of banks owned by foreign investors grew by 17.77 percent in the 2004 to 2010 period, while the cost for local banks only grew by 13.06 percent. The difference in cost of the two bank groups reached 471 basis points. Average annualized income of local banks grew by 15.11 percent, below the income growth posted by banks owned by foreign investors at 18.64 percent.

Efficiency is evident in the difference between income and cost, which for local banks was 205 basis points, while the foreign-owned one was 87 basis points.

Bank Expansion

Sigit Pramono, Chairman of the National Commercial Bank Association, said that local banks seemed to be more efficient than banks owned by foreign investors. Comparison to overseas banks, however, showed that local banks are not that efficient. “Indonesian banking BOPO is currently around 70 percent, while in several developed countries, the ratio is 50 to 60 percent,” said Sigit.

Reason for higher BOPO for banks in Indonesia is bank expansion -- adding branch offices and investments in the technological sector. In overseas countries, adding branch offices banks are not that easy due to venue limitation and smaller number of unbankable population compared to Indonesia.

Pahala N. Mansury, Chief Financial Officer of Bank Mandiri, said that Bank Mandiri BOPO ratio for the first quarter of 2011 decreased to 56 percent compared to previous years. “In the first quarter of 2011, we recognized a one-time revenue in relation to non-performing loan collection,” said Pahala. Pahala said that Bank Mandiri's normal BOPO level is at 63 to 67 percent.

According to Jahja Setiaadmadja, President Director of BCA, the bank's BOPO ratio is modest as the bank managed to increase operating income. He added that the ratio does not yet reflect efficiency. “A better measure of bank efficiency is the cost efficiency ratio, as the ratio does not include cost provision,” said Jahja.

BCA's cost efficiency ratio for the first quarter of 2011 was at 51 percent, lower than the first quarter of 2010 at 54.5 percent. Jahja said that the number can be lowered even further at the expense of no expansion. “The current strategy is to expand the number of branch offices and electronic channeling, thus we will maintain the cost effiency ratio at around that number," said Jahja.

Local Banks More Profitable

The IFT Research Department assessment also discovered that local banks profitability is higher than banks owned by foreign investors, as evident from the net interest margin (NIM) figures. Local banks are more profitable as their earning yield is higher and their cost of fund is lower than banks owned by foreign investors.

The average local banks' earning yield is at 8.3 percent to 12.1 percent with cost of fund at 2.8 percent to 4.1 percent. Banks owned by foreign investors have an earning yield level at 7.1 to 9.3 percent, and an average cost of fund at 3.2 to 4.2 percent.