Indonesian banks have been on a tear over the last several years, posting record profits while their balance sheets grew rapidly. According to the financial services regulator, at the end of 2024, commercial banks in Indonesia held assets totaling $779 billion (assuming a rate of 16,000 rupiah to the dollar). This breakneck growth has led to robust earnings, with the sector posting combined after-tax profits of $16 billion last year and $15 billion in 2023. So why is this happening, and will it last?
First, we need to go back a couple of years and look at what caused the boom. Somewhat counterintuitively, the pandemic ended up being very good for the bottom line of big commercial banks. With the world on lockdown, people took money they normally would have spent on other things and simply put it in the bank. Customer deposits in the Indonesian banking system increased 36 percent from 2019 to 2022.
Normally, banks take customer deposits and make loans, but they weren’t really able to do that during the pandemic because the economy was in a state of suspended animation. Governments, on the other hand, including the Indonesian government, were spending money as they began running large deficits and issuing debt to fund stimulus packages while the world was on lockdown.
A lot of these bonds were absorbed by the banking system. In 2019, Indonesian banks held around $45 billion worth of bonds on their balance sheets. By 2022, that figure had more than doubled to $97 billion. Also in 2022, after two years of this wait-and-see approach, banks got back to lending at scale, with loans growing around 10 percent each year from 2022 to 2024.
In essence, the pandemic pushed a lot of money into the banking system, which banks used to buy bonds (which in Indonesia have fairly attractive yields) when lending opportunities became scarce. As the economy recovered, these banks began unwinding some of their bond positions and sped up the pace of loan issuance. It was this period, from 2022 to 2024, when the big banks started posting huge profits as interest rates went up.
Indonesia’s commercial banking system is dominated by four major players. Bank Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia are majority-owned by the state. In 2024, they had combined assets of $347 billion, and after-tax income of over $9 billion. Together, they paid investors over $5.7 billion in dividends last year, with BRI alone paying out around $3 billion. The fourth major player, Bank Central Asia, does not have state ownership but had a great year, reporting an after-tax profit of $3.4 billion.
One interesting thing is that while overall lending in the commercial banking system grew 10 percent in 2024, deposits only grew 4.5 percent. The pandemic days, when people were putting money into accounts faster than banks could lend it out, are over, and we should probably expect deposits to rise at a more modest rate in the near term. How will this affect Indonesia’s booming commercial banks?
From a systemic point of view, the banking sector seems to be on a pretty sound footing. While the pace of deposits and perhaps lending may be slowing, reserves held by banks to cover non-performing loans have been decreasing. That means, for the time being, it does not appear that borrowers are defaulting en masse.
The overall loan to deposit ratio in the commercial banking sector was also around 89 percent in 2024, lower than it was in 2019, which is a fairly conservative ratio. It tells us the system is not highly leveraged and can likely withstand some stress in the event of an unexpected external shock like, say, a trade war. It also means there is room for more loan growth, as long as consumers and businesses are in need of financing.
While the system may be on solid footing, we will have to wait and see if the big banks continue booking massive profits or if that was the result of unique circumstances forced upon the sector during and immediately after the pandemic. If consumer purchasing power is really being squeezed and business and investor sentiment is turning negative, as has been reported by various outlets, it will start to show up in the earnings of the big banks sooner or later, as there will be less demand for credit and default rates will begin ticking up.
And this is something we should keep a close eye on in the coming years, because Indonesia’s growing phalanx of state-run investment funds is increasingly turning to state-owned banks, which have been very reliable cashflow generators in recent years, to help fund their activities. The size of Mandiri’s dividend is no longer just of interest to shareholders, but is a key piece of data that will help us better understand how Indonesia’s new state-run investment funds are being structured and operated.