Among the smouldering ashes of corporate banking in Indonesia, there is still money to be made. PT Bank DBS Indonesia (DBS Indonesia) was forced to forage for its revenue by changing its focus and taking on new risks. In the process it has proved that there is money to be made in one of Asia's riskiest countries.
Up until the middle of last year, DBS Indonesia was borrowing substantial amounts from its Singapore head office to fund its operations, and paying the price for it. The interest on the loans were subject to 10% withholding tax. According to Lee Meng Soon, president of DBS Indonesia, the bank instead mobilized corporate and retail deposits to fund loans and placements in the money market. This served to reduce the amount of borrowings from Singapore and meant that DBS could take advantage of the margin between deposits received from customers and what DBS put on to the money market.
SME trade finance
The bank also took a positive attitude to taking on new corporate risks, particularly on the trade finance front where DBS Indonesia refocused on the small to medium enterprises (SMEs). "These SMEs are mainly exporters with a US dollar revenue stream. Many of these companies were not affected by the recession as they were export orientated and managed to retain their market...business as usual," says Lee. The companies are mainly ones in the manufacturing, petrochemical, garment and textiles industry.
"Letters of credit issued by local banks are not accepted by foreign parties," says Lee. As a result, DBS Indonesia has been throwing it's doors wide open to a market left floundering. "The pie has not increased substantially, it has been re-divided among the players left...and our position as a strong bank has helped us take up a part of the pie," says Lee.
New treasury initiatives
Substantial revenue also came from an expanded customer base in DBS Indonesia's treasury operations. Up until last year, the bank's foray into the foreign exchange market was to fund their loans, says Lee. Since then, the bank has implemented a product for corporate customers that is linked to corporate deposits. DBS Indonesia will allow the company to trade up to 5 times their deposits amount at an interbank rate.
This, says Lee, has had the effect of encouraging deposits and boosting the volume of foreign exchange business. The bank has about 100 corporate customers trading mainly in US dollars, which is the denomination in which most of the Indonesian companies have to make payments. According to Lee, there is still no substantial market for sophisticated derivatives trading.
Why the push into treasury activities in a volatile market? "We could not expand into the corporate lending business because the situation here is not totally out of the woods yet," says Lee. Instead, Lee continues, there were opportunities for returns in the money market.
As for the future, DBS Indonesia expects that profits to continue to come from their trade finance and treasury activities, short term corporate lending and new individual banking initiatives due to be launched in the next year.
DBS Indonesia posted a Rp23.6 billion ($2,836,538) operating profit for the first half of this year, up from Rp809 million ($97,235) in the same period last year.