Watch out for bad credit after the dividend party

By Karnoto Mohamad, Deputy Editor-in-Chief of Infobank

Bankers must tighten their seat belts. After the rain of dividends enjoyed by jumbo-class banks this year, now the threat of profit growth stagnation looms in 2024. With profits skyrocketing by 20.57 percent to IDR243.32 trillion last year, bankers have been feasting on dividends this year.

Shareholders of 19 public banks enjoyed dividends of IDR139.73 trillion, an increase from the previous year’s IDR113.42 trillion. The dividend payout ratio averaged 60.79 percent of the 19 banks’ profits of Rp229.86 trillion, or contributed 94.46 percent of the total banking industry profits in 2023 of Rp243.32 trillion.

The dividend party will certainly continue. Although there will be a slowdown and even a threat of stagnation in profit growth experienced by a number of banks, the top banks generally have strong horses in facing uncertainty until the end of 2024 so that they still dare to share the dividend payout ratio to above 60 percent. The dividend payout ratio of the banking industry in aggregate continues to increase from 37 percent in 2017, to 54 percent in 2021, 61.76 percent in 2023, and 60.79 percent in 2024.

However, according to a study by the Infobank Research Bureau in the Infobank Version 2024 105 Bank Rating study, bankers must be able to overcome two main challenges this year so that their bank shareholders can enjoy another dividend party like this year.

One, liquidity conditions are still tight, accompanied by rising interest costs that will suppress net interest income. As of April 2024, interest expenses, which increased by 21.70 percent on an annual basis, also suppressed net interest income growth of only 2.96 percent. The net interest margin (NIM), which trended upward from 4.51 percent in 2021 to 4.71 percent in 2022 and 4.81 percent in 2023, began to decline again to 4.56 percent as of April 2024.

The efforts of banks to boost non-interest income to support income when credit expansion cannot be boosted quickly have not had much impact on profitability. This is because non-interest operating income only grew by 7.26 percent, less than the increase in operating expenses other than interest which reached 8.42 percent.

Second, credit quality declined as indicated by the increase in loan at risk (LAR) from 10.94 percent as of December 2023 to 11.04 percent as of April 2024. At the same time, non-performing loans (NPLs) increased, as shown by the ratio of non-performing loans (NPLs) from 2.19 percent as of December 2023 to 2.33 percent as of April 2024.

Bankers have also put on their seat belts. Loan Loss Provision (CKPN), which was reduced by Rp16.48 trillion to Rp333.04 trillion in 2023, increased by Rp6.19 trillion to Rp339.23 trillion in the first four months of April 2024.

Rising interest expenses and declining credit quality are a “lethal” combination to stop the rate of profit growth of banks that rely on net interest income. Banking profits as of April also contracted 0.47 percent year on year. A number of giant banks have also announced their financial performance as of June 2024 which is characterized by slowing profit growth.

In fact, Bank Rakyat Indonesia’s (BRI) profit stagnated because it only rose 0.95 percent to Rp29.70 trillion. Net interest income, which grew 6.69 percent to Rp69.93 trillion, was pressured by asset impairment costs which reached 52.2 percent to Rp21.35 trillion as non-performing loans (NPLs) rose to 3.21 percent. BRI’s credit grew 11.20 percent to Rp1,336.8 trillion of which around 82 percent disbursed in the micro, small and medium enterprise (MSME) sector.

Meanwhile, since the end of 2023 the MSME liquidity and profitability index has decreased, which has an impact on BRI’s performance. Industrially, MSME credit growth as of April 2024 was only 7.30 percent, far below aggregate credit growth of 13.09%, while corporate credit was able to grow up to 18.45 percent.

This year, BRI is the bank that distributes the most dividends with a dividend payout ratio of 79.61 percent. Although the portion decreased from the dividend payout ratio of 84.61 percent the previous year, the dividend figure increased because in 2023 BRI distributed dividends of IDR 43.49 trillion from profits of IDR 51.41 trillion in 2022. The government through the Ministry of State-Owned Enterprises (BUMN), which owns 53.19 percent of BRI shares, also reaped IDR 25.50 trillion in profits this year.

Which banks have their owners enjoying a jumbo dividend party this year? Which banks in Infobank’s 105 Bank Rating 2024 study scored the highest in their class? See also the list of 417 people’s economy banks that performed very well amid the hegemony and digitalization onslaught of giant banks in Infobank Magazine Number 556 August 2024. (*)