Indonesia Banking Survey 2017: Weathering the rise in credit risk – What’s next for banks in Indonesia?

Tuesday, 04 April 2017

In this week's blog, David Wake, PwC Indonesia's Financial Services Leader, discusses the outlook for the banking industry in Indonesia, as well as how digital transformation plays a key role in fuelling the growth of this industry. He also advises where banks in Indonesia should direct their focus following the recent rise in credit risk in the country.

Wake’s discussion points are derived from key findings from PwC Indonesia’s recently launched survey titled ‘Indonesian Banking Survey 2017 – Weathering the rise in credit risk. What’s next for banks in Indonesia?’, which surveyed 78 respondents from 58 different banks within the country.


Outlook for growth

Indonesia is the most attractive market for financial services in Southeast Asia, driven by excellent margins. However, despite what people may think, the most immediate prospects for loan growth and economic growth are not the main attractions – but rather, the longer-term potential of a large, growing market with current low banking penetration. In the meantime, the country’s main attraction is its high margins that make for more attractive, profitable banking.

After a challenging two years of rising credit risk and an increase in non-performing loans (NPLs), most bankers see conditions improving for Indonesian banks as credit risk stabilizes and NPLs are expected to decrease.

Furthermore, Indonesia’s loan growth compares favorably with other markets, even though it is forecasted to be lower than the past – a growth rate of 10% or more is expected in 2017, according to more than half the bankers surveyed.

Large, state-owned banks are driving growth, with 75% expecting growth in excess of 15% in 2017, compared to only 32% and 19% for local private and foreign banks, respectively.

Nevertheless, a key concern still persists with relation to the outlook on growth, as almost all bankers see credit risk as the biggest challenge to loan growth and more than one-third are either undecided or feel that NPLs will remain at the same level.

High margins in Indonesia have driven some of the past complacency around operations and risk management that caught many banks by surprise, as borrowers began to have difficulties with repayments. While margins and profits were good, the balance of attention was on growth and not on managing risk.

Our challenge to bankers is, with credit risk seemingly stabilizing, whether banks are prepared to operate in a future with lower net interest margins (NIMs). In this regard, more than half of bankers surveyed expect a decline in NIMs in 2017, compared to only approximately 30% in each of our last three surveys.

We believe banks that will be most successful long-term in Indonesia are not only those with a focused overall strategy, but those who also have a focused Fit for Growth strategy and implementation.



Source: Strategy& Fit for Growth


Digital transformation

The banking industry in Indonesia is also undergoing a significant transformation driven by technology. More than half of the respondents surveyed said technology will be the main driver of transformation in their bank over the next three to five years.

Technology is seen by many – especially mid-size banks – as a way to level the playing field with larger banks by providing new access to customers while driving down the cost of acquisition and servicing. Most bankers (84%) said that they are likely or very likely to invest in technology transformation over the next 18 months.

While physical branches currently account for more transactions than digital channels, we are already witnessing a shift in the last two years: In our 2015 survey, 75% said more than half their transactions were via the branch, whereas this year, it was down to 45%. In contrast, in 2015, only a quarter of transactions were made via a mobile device or over the internet, which is now up to 48%.

These changes are driving bankers to reassess their digital strategy –only 9% have continued with the same strategy over the last 18 months and only 19% felt there was “high clarity and understanding” of the overall strategy amongst employees. One challenge is resources as most bankers surveyed felt there wasn’t a large pool of highly skilled talent in strategy-related areas.

Is the glass half-full or half-empty?

When asked about their digital strategy, only one-third of bankers surveyed felt their digital strategy was “very clear”. Can one interpret this as meaning the remaining were not clear of what their digital strategy would be? Is “somewhat clear” (55%) an option in today’s environment? Similarly, only 21% felt their IT systems are “very prepared” for the future needs. There appears to be room for sharpening digital strategies.

What are the risks, and are bankers in Indonesia prepared?

Macro-economic and credit risks were by far viewed as the top risks to the industry. In 2015, there was significant concern about rising NPLs: almost half of bankers were expecting NPLs to increase. Few bankers (16%) at that time expected NPLs to decrease. The last two years have followed those expectations, with credit losses steadily rising.

In our 2017 survey, however, these views have clearly reversed – now almost half expect NPLs to decrease.

However, there is still apprehension. While 69% of those surveyed from local banks expect a decrease in NPLs, this number was only 28% for foreign banks. There are a large number of respondents who expect the same level of NPLs (37%) as in 2016.

In addition to NPLs most bankers (76%) also felt that the banking industry in Indonesia was ‘somewhat’ prepared to address macroeconomic, credit and technological risks, with only 5% feeling the industry was ‘very’ prepared, indicating much room for improvement.

Most bankers (two thirds) surveyed felt that their own bank had a clear risk management strategy in place. When asked about the satisfaction levels of specific areas of risk management, however, the results were more varied.

On a scale of 1 (unsatisfied) to 5 (very satisfied), overall satisfaction levels with credit, operational and technology risk was mid-level at best (3.7, 3.5 and 3.5, respectively), and credit risk management satisfaction was significantly lower than in 2014 (4.2).



It’s been two years since our last survey; a lot has changed. We have seen rising volatility in financial markets, weak commodity prices and a sharp increase in NPLs. Brexit and a surprising US election result have both added to global uncertainty.

Although our 2015 survey saw many bankers forecasting a rise in credit risk, the majority underestimated the extent of that risk, which resulted in a lot of change in credit risk management procedures and less overall confidence in risk management activity.

This year’s survey highlights that there is much more than credit risk to be managed, and with the pace of change in the industry, banks should focus on how to be not just “somewhat” prepared, but rather “very” prepared.


David Wake | PwC Indonesia Financial Services Industry Leader
+62 21 528 90800 | Website


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