Indonesia's lenders are likely to attract more foreign investment as they prepare for stricter capital requirements by end-2022 and as the country's economic growth prospects improve.
Nearly half of 83 Indonesian banks covered by S&P Global Market Intelligence will need to raise new capital from investors to meet more stringent capital requirements, based on their Tier 1 capital levels as of Sept. 30, 2021. All lenders must have at least 3 trillion rupiah of Tier 1 capital by Dec. 31, as part of the Financial Services Authority's efforts to strengthen the nation's banking system. At least 32 banks had capital below 2 trillion rupiah as of Sept. 30, 2021.
More deal activity is likely among smaller, less capitalized lenders in 2022, analysts said. These banks may turn to foreign investors that have long been drawn to the Indonesian banking system for its above-average margins and loan growth, said Yulinda Hartanto, an analyst at brokerage CGS-CIMB Sekuritas Indonesia.
This year "will be the last year for banks to meet the requirement and some banks have not met this capital level; thus, it shall continue in 2022," Hartanto said.
Indonesia's banking and payment sector companies offer attractive growth prospects to foreign investors seeking to tap the nation's population of more than 270 million people. The aggregate return on average equity of Indonesian banks was 7.37%, 12.31% and 12.93%, respectively, for the last three years. Banks' aggregate net interest margin was 4.96% in 2020, well above most other jurisdictions in the Asia-Pacific region, according to Market Intelligence data. Economic growth prospects are improving for the country amid the ongoing recovery from a pandemic-induced slowdown, with Asian Development Bank anticipating GDP to grow 4.8% in 2022.
Since 2017, the Southeast Asian country has seen 35 banking M&A deals and 9 payments sector deals, according to data compiled by Market Intelligence. Deal activity cooled after a busy 2019 when more than a dozen deals were announced, including Bangkok Bank PCL's $2.40 billion acquisition of PT Bank Permata Tbk.
Tech shift
Indonesian banks and payments companies could also see investments from technology companies as more such players make a shift to financial services. Ride-hailing service provider Grab Holdings Ltd. recently teamed up with Singtel to buy a combined 32.52% stake in PT Bank Fama International. The acquisition followed foreign investments in mobile wallet PT Visionet Internasional and payments infrastructures iKaaz Software Pte. Ltd. and KuDo Technology Indonesia LLC.
"[Indonesia] would be the focus for all the tech companies entering the financial sector, especially the lending segment," Hartanto said.
Investors from Japan, South Korea, Thailand and other Asian markets have remained active in Indonesia's banking sectors in the past few years as they sought to gain scale and get higher returns outside their home markets. Between 2014 and 2019, Japanese financial institutions paid or pledged at least US$9 billion for stakes in several Indonesian lenders. Those investments included Mitsubishi UFJ Financial Group Inc.'s multi-billion-dollar acquisition of PT Bank Danamon Indonesia Tbk in 2017.
As of Feb. 15, US$1 was equivalent to 14,263 Indonesian rupiah.