Although between 85 and 90 percent of the Indonesian population is Muslim, Islamic banking, also known as sharia banking (financing activity that is in line with Islamic principles), remains underdeveloped in Indonesia. In 2016 sharia banking assets only accounted for 5.3 percent of total assets in Indonesia's banking sector. Meanwhile in countries like Saudi Arabia and Malaysia these figures are much higher at 51.1 percent and 23.8 percent, respectively.

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As we are in the middle of earnings season, it is interesting to take a look at the January-June 2017 corporate earnings reports of Indonesia's listed companies. Something that stands out so far is the good earnings of banks and commodity-related companies (mining and agriculture). Of Indonesia's 15 biggest banks (in terms of assets) only four experienced a contraction in net profit. This good performance comes in times when credit growth has remained rather bleak in Indonesia. So where does banks' excellent profit growth come from?

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The Board of Commissioners of the Financial Services Authority (OJK) finally determined the positions for the seven new commissioner members for the period 2017-2022. This decision was taken at the OJK Board of Commissioners Meeting that was concluded on Thursday evening (20/07).

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The non-performing loan (NPL) ratio in Indonesia's banking sector improved slightly in June 2017. Mirza Adityaswara, Senior Deputy Governor at Indonesia's central bank (Bank Indonesia), said the gross NPL ratio was 2.97 percent in June, down from 3.09 percent in the preceding month. Despite the overall still relatively high NPL ratio in the banking sector, Adityaswara believes Indonesian banks still have room for credit expansion.

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Overall, the banking industry of Indonesia is setting a good performance in 2017 supported by rising credit growth and a lower non-performing loan (NPL) ratio. State-controlled (yet listed on the Indonesia Stock Exchange) financial institution Bank Mandiri, the largest Indonesian bank by assets, reported a 33.7 percent year-on-year (y/y) increase in net income to IDR 9.5 trillion (approx. USD $714 million) in the first half of 2017.

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The big Indonesian banks that are listed on the Indonesia Stock Exchange (IDX) have seen their shares surge so far in 2017. Moreover, their share performance is expected to retain this momentum in the second half of 2017. Among the big banks Bank Danamon Indonesia is leading the race. Its shares have surged 34.77 percent so far this year, followed by Bank Rakyat Indonesia (+27.62 percent), Bank Negara Indonesia (+26.70 percent), Bank Mandiri (+16.85 percent), and Bank Central Asia (+18.39 percent).

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Credit growth in Indonesia's banking sector is estimated to have, finally, touched double-digit figures in the first half of 2017, while growth should further accelerate in the remainder of the year. Some Indonesian banks saw their credit growth figures touch 20 percent (y/y) so far this year, a marked improvement from the situation one year ago. Lets zoom in on the performance of two big Indonesian banks.

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Following the announcement last year, the central bank of Indonesia (Bank Indonesia) has again stated that it is to ease the minimum statutory reserves (in Indonesian: giro wajib minimum) regulations for conventional local banks (both for rupiah and foreign-denominated currencies). With this looser approach, banks can manage their liquidity more effectively, which should lead to reduced volatility on the overnight money market ("interest rate buffer").

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Indonesian banks are expected to be cautious boosting credit disbursement in the next couple of quarters because the non-performing loan (NPL) ratio is currently high with the gross NPL ratio hovering above 3 percent since mid-2016, approximately the same level as it was in 2011 when Indonesia's five-year economic slowdown commenced. Although various external and internal matters were to blame for Indonesia's 2011-2015 economic slowdown, the high NPL ratio today can undermine economic acceleration as credit growth is curbed.

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After decades of the "banking information secrecy" culture in Indonesia, local banks now seem more willing to share clients' financial information to tax authorities (both local and foreign authorities). Earlier, Indonesian banks were reluctant to disclose this information as such transparency could mean banks would lose valuable clients. These "big clients" supply over half of banks' deposits. However, the situation has now changed due to the government's tax amnesty program.

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Despite concerns that Indonesia's benchmark stock index (IHSG) would weaken on Thursday's trading day (12/09), the index ended 0.17 percent up to 4,356.61 points. Indices on Wall Street and in Asia impacted positively on the IHSG and kept foreign investors increasing their stock portfolios in Indonesia. Moreover, the Bank Indonesia's decision to raise the country's benchmark interest rate (BI rate) by 25 basis points to 7.25 percent was generally well-received by investors. Banking stocks helped to support the IHSG.

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According to global credit rating and research agency Fitch Ratings, Indonesia's major banks are robust against the rupiah currency slide due to their low unhedged foreign currency exposure, strong loss-absorption cushions and - in some cases - foreign ownership. The slowdown in the economy will weigh on these (rated) banks' operating environment, but is unlikely to damage their credit profiles to any great extent. Below we provide Fitch Ratings' report. This report can also be accessed on their website.

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Although the holy fasting month of Ramadan and subsequent Idul Fitri celebrations always provide a boost for national economic growth in Indonesia as domestic consumption tends to peak, analysts believe that it will not contribute significantly to the government's 6.3 percent GDP growth target this year. During Ramadan and Idul Fitri (known as Lebaran), Indonesian consumers generally spend more on food products, clothes, shoes, tickets for transport and hotels than in other months, and thus lead to increased economic activity.

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After finishing last week with three consecutive days of gains, Indonesia's main stock index (IHSG) reached up to 4,633.11. However, its movement is still rather volatile. Property, finance and consumption stocks were sold by investors after seeing the benchmark interest rate raised by Bank Indonesia (by 50 bps to 6.50 percent) on Thursday (11/07), while metal stocks formed the main supporter of the index at the end of the week. Trading volume in the regular market hit 5.2 trillion and foreigners recorded net purchases of IDR 288 billion.

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Indonesia's main stock index (IHSG) fell 3.68 percent to 4,433.63 on Monday's trading day (08/07). This current level is the lowest level of the IHSG since 26 June 2013. Of the 473 listed companies, 263 were down, 21 were up and the remainder did not move. Most Asian indices fell due to concerns about China's credit crisis that may impact on the country's economic growth and that the positive US employment report will affect continuation of the Federal Reserve's quantitative easing program. The MSCI Asia Pacific Index fell 1.6 percent.

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On Friday (14/06), the main stock index of Indonesia (IHSG) jumped 3.32 percent to 4,760.74 points as financial market participants were optimistic about the effects of the higher central bank interest rate that was announced the day before. Moreover, Indonesia's IHSG was supported by a green wave across Asian stock markets, which was partly due to a strong rebound in markets in the United States on Thursday (13/06). Stocks in Indonesia's banking and property sectors were the top-gainers on Friday's trading day.

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The central bank of Indonesia (Bank Indonesia, or BI) decided to maintain its record low policy rate for the 15th straight month at 5.75 percent as it is considered consistent with its inflation target range of 3.5-5.5 percent in 2013 and 2014. The central bank also stated that the global economic recovery is accompanied by many uncertainties which result in a lower forecast for Indonesia's economic growth. The full press release of Bank Indonesia can be read below.

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In its most recent report, the Asian Development Bank (ADB) forecasts Indonesia to continue its robust economic growth. Last year, the economy of Indonesia expanded 6.23 percent, and according to the ADB this figure will rise to 6.4 percent in 2013 and 6.6 percent in 2014. However, since the start of April there have been some issues that are causing Indonesia's stock indices to go down. Although believed to be only temporary, it is worth taking a closer look.

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We had hoped for a continuation of the Indonesia Stock Exchange (IHSG)'s rebound after forming a green candle. It failed, however, due to negative market sentiments brought on by the bailout of Cyprus. Also, selling pressures on American stock markets late last week blocked a potential longer rally. The IHSG felt the impact of the Dow Jones Industrial Average (DJIA) that fell after a weaker NY Empire State Manufacturing Index as well as Consumer Sentiment.

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Indonesian commercial banks have shown good performance in recent years as economic growth of over six percent fuels loan demand from the people and businesses. Domestic consumption and investment are the two main drivers of the country's gross domestic product (GDP) growth. Together, these two components account for almost 90 percent of GDP. As such, lenders are in a comfortable position.

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