WP 5 2015 The Impact of Capital Adequacy ... - Bank Indonesia · the policy on bank profitability. The increase in bank capital quantity will increase cost of capital (BIS and Angelini

WORKING PAPER

THE IMPACT OF AN INCREASE IN CAPITAL ADEQUACY REGULATION ON THE INTEREST RATE

SPREAD OF BANKS USING ACCOUNTING-BASED ANALYSIS

Ndari Surhaningsih

Tevy Chawwa

Reni Indriani

June, 2015

WP/5/2015

Conclusions, opinions, and views expressed by the authors in this paper are personal conclusions, opinions, and views of the authors and are not official conclusions, opinions, and views of Bank Indonesia.

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THE IMPACT OF AN INCREASE IN CAPITAL ADEQUACY REGULATION ON THE INTEREST RATE SPREAD OF

BANKS USING ACCOUNTING-BASED ANALYSIS

Ndari Surjaningsih 1, Tevy Chawwa2, Reni Indriani3

Abstract

This research aims to conduct an early estimate on the impact of capital adequacy policy change on bank’s interest rate spread using accounting relationship-based simulation approach to the balance sheet and income statement of a representative bank. Research result shows that 1 percent of capital adequacy ratio (CAR) increase can be covered by increasing interest rate spread of 6 basis point (bps). The calculation result is obtained from the assumption that return on equity (ROE) and bank borrowing cost do not change as well as there are no changes in the bank’s total assets and non-operational cost. If ROE and borrowing cost are assumed to be changing, the impact on interest rate spread will be smaller. Using the same method for representative bank based on BUKU, it shows that BUKU 1 needs the smallest lending spread increase (1 bps), while BUKU 4 needs the largest lending spread increase (32 bps). The factor affecting differences in the impact of an increase in capital adequacy regulation is the current bank’s ROE. The higher an ROE, the higher interest rate spread increase which is needed.

Key words : banks, regulation, Basel III, capital, liquidity, lending

spreads

JEL Classification : G21, G28, E51

1 and 2: Senior Economic Researcher and Economic Researcher in the Macroprudential Regulation and Research Group (GRMP), Department of Macroprudential Policy (DKMP), Bank Indonesia. Opinions in this paper are opinions of the authors and are not official opinions of DKMP or Bank Indonesia. E-mail: ndari @bi.go.id and [email protected].

3 Research Assistant of Macroprudential Regulation and Research Group (GRMP), Department of Macroprudential Policy (DKMP), Bank Indonesia.

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I. PREFACE

1.1 Background

The Department of Macroprudential Policy (DKMP) of Bank Indonesia is

currently developing model to explain the linkage between macroeconomic variables

and banking variables based on individual bank data under the name Financial

Macroeconometric Model Bank Indonesia (FMM BI). This model maps the

relationship and estimates various banking variables, including credit interest rate.

In the FMM BI development research phase 1 in 2014 there was an estimation of

credit interest rate with independent variables comprising cost of fund (deposit

rate) and credit risk (NPL ratio). In its development several literatures mention the

linkage between capital adequacy from regulator and bank interest rates. This year

there will be FMM framework improvement which among others includes review on

credit interest rate equation by considering additional capital adequacy regulation

as independent variables. Therefore, this research is aimed at becoming a

preliminary study to support the equation review.

Another background which underlies this research is that post-global

financial crisis the Basel Committee continues to improve on strengthening bank

capital aspect. Capital becomes an important aspect because it functions as

cushion if banks suffer losses. Admati et al. in Swamy (2014) states that the higher

capital, the lower leverage and bank’s bankruptcy risk. Several capital policies

which will be implemented are capital surcharge for Domestic Systemically

Important Banks (DSIBs), countercyclical capital buffer (CCB), and conservation

buffer. Those capital policies will be implemented in Indonesian banking in stages

starting from 2016.

In every capital policy implementation, there are arguments on the impact of

the policy on bank profitability. The increase in bank capital quantity will increase

cost of capital (BIS and Angelini et al., in Swamy, 2014) which will then increase

the weighted average cost of capital. The cost increase will then be channeled to

borrowers in form of credit interest rate increase. With the relationship, it is

important for regulators to know how much is the impact of capital policy change

on bank interest income and how much is the potential increase of bank interest

rate spread. Therefore, this research is also a starting step to see bank behavior in

facing capital policy change, especially related to interest rate changes.

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1.2 Research Purpose

The main purpose of this research is to estimate the impact of capital policy

change on profitability of Indonesian banking sector, especially on interest rate

spread of banks. The research result is expected to provide input in improving

FMM framework, which is currently under development.

1.3 Research Limitation

Several limitations from simplification of assumptions and methods used in

this research are as follows.

(1) This research assumes that cost increase due to capital is transmitted to

customers through credit interest rate increase. In reality, banks have other

strategy options, such as reducing deposit interest rate, performing asset

reallocation, lowering operational cost, etc.

(2) Estimation result is not based on optimization process in general equilibrium

condition.

(3) This research assumes that balance sheet and income statement of

representative bank is in steady state condition and does not consider

transitional period in fulfilling capital requirement increase.

(4) This research assumes that banks will maintain the buffer level of difference

between CAR and capital requirement so even then CAR is already above the

requirement, capital requirement increase will cause banks to still increase

their capital.

With the limitations, this research is expected to provide preliminary

description on bank response to changes in capital requirement with a practical

but acceptable approach.

1.4 Method of Writing

This research is constructed in four sections. The first section discusses

background, purpose, and limitation of the research. The second section explains

several literature studies as well as previous researches which are relevant with the

research. The third section discusses methodology as well as several accounting

equations which are used in estimating the impact of capital regulation change on

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interest rate spread. Then the fourth section describes general view on Indonesian

banking industry development currently as well as the data analysis. The fifth

section is conclusion and recommendation.

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II. LITERATURE STUDY

Basic literature commonly used as the base of research on impact of cost of

capital on company’s finances is the research of Modigliani Miller (1958). In the

research, Modigliani states that in a perfect capital market condition, signified by (i)

no transaction cost; (ii) no taxation imposed; (iii) no asymmetric information; and

(iv) no possibility to default, value and cost of fund of companies are not affected by

the composition of debt and capital in corporate financing. In reality with taxation,

cost of capital becomes higher than debt (R equity > R debt). It is caused by debt

interest payment which is a cost factor that will reduce the taxable profit of

companies. However, an extremely high debt will affect to an increase in risk.

Therefore, corporate will try to approach an optimal combination of debt and equity

for the company.

Banking as a company is also implementing a combined source of funds

from debt and equity. Different to other companies, there are rules for banking on

the minimum bank capital to maintain the continuity of banking activities

prudently. Bank capital adequacy is internationally regulated by the Basel Accords

issued by the Basel Committee on Banking Supervision. There are several changes

in capital adequacy regulations: Basel I (since 1988), Basel II (since 2001), and the

latest one Basel III (since 2008 crisis, but implemented in stages in 2013–2019). In

accordance with Basel III, banks are required to increase capital to be more

resilient in crisis. There are 3 types of additional capital which will be implemented:

Capital Surcharge D-SIBs, Countercyclical Capital Buffer, and Conservation Buffer.

The changes in Basel III requirements are accommodated in PBI 15/12/PBI/2013,

as follows.

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Source: Material of PBI 15/12/PBI/2013 Socialization, Department of Research and Banking Regulation, OJK.

Figure 1. Change in Minimum Capital Requirement (MCR) for Commercial Banks

There are several researches on the implication of capital increase policy in

accordance with Basel III to bank credit rate stipulation. Elliot (2010) in Swamy

(2014) used accounting-based analysis to estimate how much credit rate will

increase if banks are asked to increase equity. In the model, Elliot assumes that

banks only hold loans funded by equity, deposits, and wholesale funding, as well

that as interest revenue originated from credit is aimed to meet ROE target. Credit

rate stipulation is made to meet ROE target after covering cost of liabilities and

other fixed cost. Using FDIC (Federal Deposit Insurance Corporation) data for all

United States (US) banking system—if the ratio of common equity to credit

increases 2% and there are no other changes—banks need to raise lending spreads

around 39 bps to maintain ROE target of 15%. If ROE target can be reduced to

14.5%, lending spreads must increase 9 bps. Based on the analysis, Elliot deduces

that there is a possibility that the US banking system can face capital increase

policy and ensure that it will not have great impact to interest rate stipulation.

Simplicity and also intuitions in stipulating credit rate and alternatives that can be

made by banks to meet the higher capital level are among the strengths of Elliot

approach.

In another research, King (2010) conducts analysis on impact of capital

increase policy on lending spreads in 13 OECD countries. King compiles a

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representation from bank’s balance sheet and income statement based on their

balance sheet and income statement average for the last 15 years. With the average

lengthy period, it is assumed that the representation of balance sheet and income

statement used is in steady state condition. Furthermore there is a mapping how

the change of structure in bank capital and asset composition affects net income

components using accounting relationship. Banks are asummed to transmit cost

increase due to capital increase to interest expense borne by debtors. Despite

having limitations, the approach used by King is relatively simple and can be a

preliminary study to understand bank behavior to policy changes. Research result

concludes that cost emerging from 1% increase in capital ratio can be covered by a

lending spreads increase of 15bps under the assumption ROE and cost of debt do

not change. If ROE and cost of debt can be decreased, the impact on lending

spread will be smaller.

Swamy (2014) tried to implement the method in King’s paper for Indian

banking and conducted simulation to several banking groups. The research shows

that 1 percent of capital increase can be covered by lending spreads increase of

11.4 bps assuming there are no changes in risk weighted assets. Since 2009 there

has been no researches by Bank Indonesia which see the impact of capital

regulation increase on bank interest rates. However, there are several researches

related to the relationship between capital and interest rate. In his research on

determinant of bank interest rate spread, Purwanto (2009) uses several degree of

risk aversion bank variables which were proxied by ratio (𝐶𝐴𝑅 owned-𝐶𝐴𝑅

required)/CAR required as one of the determinants. The research using banks’

panel data in January 2002–April 2009 finds that banks with higher surplus of

CAR will have lower interest rate spread. Another related research is research on

monetary policy transmissions conducted by Dewati et al. (2009). Using banks’

panel data in January 2002–April 2009, the research concludes that liquidity and

amout of assets affect BI rate transmission to credit interest rate, while bank

capitalization is not significant in affecting the transmission. Furtheremore, Gunadi,

Deriantino, and Budiman (2011) conducted research using OLS of banking

industry data in September 2000–March 2011 and find that sensitivity of bank

credit rate to BI rate is affected by bank’s CAR condition. If bank’s CAR is more

than 19.8%, response to a 1% BI rate increase is 0.1%. Meanwhile, if bank’s CAR is

less than 19.8%, response to BI rate is higher, at 0.22%. From those researches,

there is not yet a research which specifically explains the impact of capital

regulation policy change on interest rate spread of banks.

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III. METHODOLOGY

3.1 Data and Theoritical Framework

This research was conducted by replicating the methodology used by King

(2010) and Swamy (2014), by using standard accounting relationship in the

balance sheet and income statement of banks. The components of balance sheet

and income statement have been adjusted to the Indonesian banking data. The

data used is balance sheet, income statement, and banking performance originated

from LBU with data period of 2010–2014 (December position). In this research

sharia banking was not included because of its nature of being not-interest based.

Based on the data of 107 banks, a balance sheet and income statement of

representative bank was formulated which is the weighted average of balance sheet

and income statement of individual banks in the past 5 years. As for the weight

used in average calculation of each component is total asset of each bank.

Moreover, there was composition of balance sheet and income statement

representative for each BUKU of banks. This research focuses on steady state

condition and does not consider transition period when banks try to fulfill higher

new capital requirement. Therefore, it is assumed that banks have passed through

transition phase and are able to fulfill the new capital adequacy requirement.

The impact of capital adequacy policy change will be estimated using

simulation of changes in asset and liabilities as well as income statement

composition of representative bank. Ratio of capital to RWA from representative

bank is raised 1 percent (1 pp) so banks will increase their capital. Furthermore,

assuming that asset composition is unchanged, bank’s capital increase will cause

bank lending to decline. That reduces the amount of loan interest expenses which

banks must spend and raises bank’s net income. On the other hand, there is a

decline in bank ROE ratio because net income is divided by higher capital amount.

If banks do not expect a decline in ROE, they should take measures to increase net

income from existing assets. There are several options that banks can do, among

others, by reducing operational cost or increasing non-interest income. In this

research banks are assumed to increase interest rate spread by raising credit rate

to offset ROE decline. Theoritical framework of this research is illustrated in the

scheme below.

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Figure 2. Theoritical Framework of Impact on Capital Requirement to Interest Rate Spread

Hereafter the mapping of relationship between components of bank balance

sheet and income statement used in this research will be described in the next

section.

3.2 Mapping of Balance Sheet Components Relationship

Bank’s balance sheet used in this research is simplified as follows.

Table 1. Bank Balance Sheet Components

Asset Liabilities

! Cash and placement in BI ! Third Party Funds

! Placement in other banks ! Liabilities in other banks

! Securities ! Liabilities in BI

! Credit ! Securities issued, spot, and derivative

! Other assets ! Loan

! Other liabilities

Capital

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a. Asset

Bank assets consist of components (i) cash and placement in Bank

Indonesia; (ii) placement in other banks; (iii) securities comprising spot and

derivative claims, securities, repurchase agreement (repo), claims on reverse

repurchase agreement (reverse repo); (iv) credit disbursed; and (v) other assets

consisting of acceptance claims, equity investment, impairment on financial

assets, intangible assets, fixed assets and inventory, abandoned property,

foreclosed assets, suspense account, interbranch assets, impairment on other

assets, deferred tax assets, and other assets.

𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑃𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑖𝑛 𝐵𝐼 + 𝑃𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑖𝑛 𝑜𝑡ℎ𝑒𝑟 𝑏𝑎𝑛𝑘𝑠 + 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 +

𝐶𝑟𝑒𝑑𝑖𝑡 + 𝑂𝑡ℎ𝑒𝑟 𝐴𝑠𝑠𝑒𝑡𝑠

b. Liabilities:

Total bank liabilities consist of (i) third party funds (TPF) comprising

demand deposit, savings, and time deposits; (ii) liabilities to Bank Indonesia; (iii)

securities issued and derivative spot consisting of derivative spot liabilities,

repurchase agreement (repo) liabilities, and securities issued; (iv) total loans

comprising liabilities to other banks+loans; and (v) other liabilities consisting of

acceptance liabilities, margin deposit, interbranch liabilities 4 , deferred tax

liabilities, and other liabilities.

𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 𝑇𝑃𝐹 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑡𝑜 𝐵𝐼 + 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 𝐼𝑠𝑠𝑢𝑒𝑑 𝑎𝑠 𝑤𝑒𝑙𝑙 𝑎𝑠 𝑆𝑝𝑜𝑡 𝑎𝑛𝑑 𝐷𝑒𝑟𝑖𝑣𝑎𝑡𝑖𝑣𝑒

+ 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 + 𝑂𝑡ℎ𝑒𝑟 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

c. Equity

Equity is formed of loan capital, paid-in capital, additional paid-in

capital, difference in fixed assets revaluation, reserves, previous year income,

and current year income. Capital amount can be approached by total assets

subtracted by liabilities. For domestic banks, capital calculation is taken

directly from banks’ balance sheet data, while for foreign banks, capital

calculation is made by considering total foreign capital derived from data of

foreign banks’ capital components (MCR data).

4 Specifically for Foreign Bank Branch Offices there will be reduction of interbranch liabilities with their business funds.

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3.3 Mapping of Relations between Income Statement Components

and Bank Performance

Bank’s income statement components in this research are simplified as

follows.

Table 2. Bank Income Statement Components

No. Income Statement Components

1 Interest Income

2 Interest Expense

3 Net Interest Income (1-2)

4 Non-Interest Operating Income

5 Non-Interest Operating Expense

6 Non-Interest Operating Net Revenue (4-5)

7 Net Operating Revenue (3+6)

8 Non-Operating Revenue

9 Non-Operating Expense

10 Net Non-Operating Revenue (8-9)

11 Total Profit (Current Year Profit) (7+10)

12 Current Year Tax

13 Net Profit (11-12)

14 Tax Rate (to Profit)

a. Net Interest Income

𝑁𝑒𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

b. Net Non-Interest Operating Income

Net Non-Interest Operating Income=Non-Interest Operating Income

− Non-Interest Operating Expense

c. Net Operating Income

Net Operating Income=Net Interest Income+Net Non-Interest Operating Income

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d. Net Non-Operating Income

Net Non-Operating Income=Non-Operating Income − Non-Operating Expense

e. Total Profit

Total Profit=Net Operating Income+Net Non-Operating Income

f. Tax Rate

𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑡𝑎𝑥 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑝𝑟𝑜𝑓𝑖𝑡

g. Net Profit

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 𝑃𝑟𝑜𝑓𝑖𝑡 × 1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒

h. ROE

Bank’s latest and the most expensive source of funding is equity. The

relation between change in equity and bank’s return on equity (ROE) is

illustrated in the following equation.

𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

ROE is the amount of profit that will be obtained by banks from their

equity. With the increase in bank’s equity, ROE will experience a decrease and

vice versa.

i. CAR

The relation of capital increase will affect the change of CAR value as

illustrated in the following equation.

𝐶𝐴𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝑅𝑊𝐴

3.4 Mapping the Impact of Increase in Capital Adequacy Requirement

a. Capital increase

𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!!! = ∆𝐶𝐴𝑅×𝐴𝑇𝑀𝑅! + 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!

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b. Increase of necessary net profit

Capital increase will cause ROE ratio to decline, while banks are

assumed to be wanting to maintain ROE (ROEt+1 = ROEt). Therefore, banks

must increase net profit by increasing interest income.

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡!!! = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!!! ×𝑅𝑂𝐸!

c. Interest expense reduction

Assuming there is no change in assets, calculation of interest expense

follows this equation.

∆ 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 = ∆ 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!!! − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒!!! = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒! − ∆ 𝑡𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 × 𝑙𝑜𝑎𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

d. Increase of interest rate spread

In line with King (2010) paper, bank interest rates follow this equation.

RTPF < Rloans < Rcapital

In a normal economic condition, the relation provides illustration that

difference in source of equity will give expected return in line with the

investment risk.

The average interest rate of banking industry in Indonesia based on

calculation result of 2010–2014 data is as follows.

Table 3. Average Interest Rate of Banking Industry

r_tpf r_interbank r_loan ROE 4.56% 5.01% 5.77% 8.54%

From the table it can be seen that banks’ ROE is relatively higher than

loan interest rate hence despite a decrease in loan interest expenses, banks still

need additional interest income to compensate increase in cost due to capital

addition.

In this research it is assumed that banks will respond capital increase

policy which causes ROE decline by increasing lending spreads. The amount of

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additional lending spreads (α) needed can be calculated with the following

formula:5

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒!!! = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 ! + 𝛼 × 𝑡𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠

α=profit –!"# non-operating income!!"# non-interest operating income +interest expense

t+1!!"#$%$&# !"#$%&t

total credit

3.5 Econometric Analysis

As an addition, in this research there will be econometric analysis on the

impact of change in capital requirement policy to credit interest rate with the

following model.

𝑟𝑐𝑟𝑒𝑑!! = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 + 𝛼! + 𝛽! 𝑟𝑑𝑒𝑝!!!!+ 𝛽! 𝑁𝑃𝐿!!!! + 𝛽! 𝑑(𝐶𝐴𝑅𝑅𝑢𝑙𝑒)!!!!

The method used is panel data of 107 banks (excluding sharia banks) with

data period of 2001Q1–2014Q4.

5 This research assumes that non-interest non-operating income and non-interest operation net income do not experience change due to the increase in capital requirement.

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IV. DATA ANALYSIS

4.1 Overview of Indonesian Banking Industry Development6

4.1.1 Development of Bank Assets and Capital

Total asset of Indonesian banking in 2014 reached around 5,410 trillion

rupiah. Total asset of this sector covered 78% of total assets of financial sector in

Indonesia. In the past five years, since 2010 to 2014 total asset of the banking

industry tended to have an annual increase with average growth 17% per year. The

biggest growth happened between 2010 and 2011, of 21%.

Figure 3. Total Industry Assets

In 2014 the biggest total asset growth was experienced by BUKU 1 bank

category with growth of 19% from the previous year, while BUKU 3 banks had the

least growth, of 7% from the previous year.

On capital, banks CAR experienced a decrease in 2011. However, since 2012

banking industry capital experienced an increase with CAR reaching 19.50% in

2014.

6 The numbers in this section are originated from data processing of individual banks which is used in this research following several data cleansing. Therefore, there is possibility of discrepancy with data in other publication/research.

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Figure 4. Total CAR Industry and per BUKU Category

The biggest CAR is owned by BUKU 2 banks, at 30.02% followed by BUKU 1

banks of 17.70%, and BUKU 4 of 17.12%, while BUKU 3 banks have the least CAR

among other BUKU, at 17.00%. Seeing the development of banking CAR based on

its BUKU category, it can be seen that BUKU 2, BUKU 3, and BUKU 4 banks

experience a CAR increase. However, amid the increase in CAR of banking industry

and other BUKU categories, CAR of BUKU 1 banks experienced a slight decline

entering 2014.

Minimum capital ratio which must be owned by banks based on Bank

Indonesia Regulation (PBI) is relatively unchanged since 2008–2011, at 8% of RWA.

However, starting from 2012 there is a new minimum capital requirement

regulation, at 8% of RWA with additional regulation according to CAR risk profile.

With the new regulation, the lowest CAR risk profile stands at 8%, while the

highest stands at 14%.

By comparing CAR for every bank BUKU category with the prevailing

minimum capital regulation, Indonesian banking still has strong and resilient

capital. It can be seen from the CAR of each BUKU category which remains above

the minimum capital requirement (Figure 5).

0

5

10

15

20

25

2010 2011 2012 2013 2014

CAR

CAR

%

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014

CARperBUKU

BUKU1 BUKU2 BUKU3 BUKU4

%

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014

CARBUKU1

CAR CARRiskProfile(Min) CARRiskProfile(Max)

%

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014

CARBUKU 2


%

17

Figure 5. Comparison of CAR per BUKU with Prevailing CAR Regulation

4.1.2 Development of Bank Interest Rate and ROE

On interest rate, development of credit and deposit rates tended to increase

in the past two years (2013 and 2014). Credit interest rate was at 11.44% and

deposit rate at 7.73%.

Figure 6. Weghted Average of Credit Rate and Deposit Rate

The same things is also illustrated by the development of credit rate and

deposit rates for each BUKU. Credit rate and deposit rate for each BUKU tend to

increase. Until 2012 bank lending spread is quite wide despite after 2012, lending

spread relatively declines. In 2014 the highest credit rate and deposit rate were

owned by BUKU 1 category banks with figure reaching 14.11% and 9.27%. In

average the highest interest rate spread, was the spread in BUKU 1 category banks

(4.84%), followed by BUKU 4 (4.04%), BUKU 3 (3.88%), and the lowest in BUKU 2

bank category (2.65%).

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014

CARBUKU3


%

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014

CARBUKU4


%

18

Figure 7. Weighted Average of Credit Rate and Deposit Rate per BUKU

Return on equity (ROE) of Indonesian banks experienced an increase and

decrease in the past 5 years. ROE of banking industry saw an increase in the

2010–2011 period, but then experienced a decline since 2012 to touching 8.41% in

2014. The ROE decline is in line with the decrease of bank lending spread as

discussed earlier.

Figure 8. ROE of Industry and ROE per BUKU

4.2 Representative Bank Simulation Result

The early stage of data processing is the formulation of balance sheet and

income statement of representative bank using the weighted average of individual

0

5

10

15

20

25

2010 2011 2012 2013 2014

ROE perBUKU

BUKU1 BUKU2 BUKU3 BUKU4

%

19

bank data in the past 5 years (Table 4). This representative bank is considered to

represent banking industry condition in Indonesia in general.

Table 4. Balance Sheet and Income Statement of Representative Bank

(in percentage to total assets, unless stated otherwise) Balance Sheet Components % Income Statement Components %

Cash and placement in BI 12.99 1 Interest Income 8.65 Placement in other banks 5.50 2 Interest Expense 4.80 Securities 8.70 3 Net Interest Income (1-2) 3.89 Credit 49.84 Other assets 22.97 4 Non-Interest Operating Income 1.77 Total assets 100.00 5 Non-Interest Operating Expense 4.08 6 Non-Interest Operating Net Revenue

(4-5) -2.32

Third Party Funds 55.51 7 Net Operating Revenue (3+6) 1.57 Liabilities in other banks 4.02 Liabilities in BI 0.03 8 Non-Operating Revenue 0.32 Securities issued, spot, and derivative 1.15 9 Non-Operating Expense 0.27 Loan 1.57 10 Net Non-Operating Revenue (8-9) 0.05 Other liabilities 23.43 Total liabilities 85.70 11 Total Profit (Current Year Profit) (7+10) 1.62 12 Current Year Tax 0.38 Capital 14.30 Total liabilities and total capital 100.00 13 Net Profit (11-12) 1.25 RWA 53.98 14 Tax Rate (to Profit) 23.12 Capital of CMR/RWA 22.95

In Table 4 can be seen that the largest component of bank assets is credit

(around 49.84%), followed by other assets7 (22.97%), cash and placement in BI

(12.99%), and placement in other banks (5.5%). As for the main funding source of

those assets comes from third party funds (55.51%) as well as other liabilities

(23.43%)8. Source of funds originated from capital is around 14.3% of total asset.

Other funding sources are relatively small: interbank liabilities (4.02%), loans

(1.57%), securities (1.15%), and liabilities to BI (0.03%). On average, banks’ RWA is

around 53.98% of total asset and capital/RWA ratio is around 22.95%.

If compared to representative bank in India and OECD9 countries, cash and

placement in BI percentage of representative bank in Indonesia is relatively higher.

In India, the percentage of placement in cash and central bank is around 5.6%,

while average OECD countries is only around 2.3%. Percentage of placement in

7 Other assets: acceptance claims, investment, impairment on financial assets, intangible assets, fixed assets and inventory, abandoned property, foreclosed collateral, suspense account, interbranch assets, impairment on other assets, deferred tax assets, and other assets.

8Other liabilities: acceptance liabilities, margin deposit, interbranch liabilities, deferred tax liabilities, and other liabilities.

9 Based on paper King (2010) and Swamy (2014).

20

other banks in OECD countries is relatively big, of around 12%, while in India is

relatively similar to Indonesia, at around 4.09%. Credit percentage in bank’s

balance sheet in India, OECD, and Indonesia is relatively similar, around half of

total assets. In terms of funding, percentage of source of funds from TPF in Indian

representative bank is much higher (75.65%), while banks of OECD countries only

around 43.5%. Source of funds from interbank loans in Indonesia is relatively

lower than India (9.16%) and OECD countries (12.6%). Equity role in bank funding

in Indonesia (14.30%) is relatively much higher compared to bank in India (7.12%)

or OECD countries (5.3%).

Table 4 also shows the composition of income statement of representative

bank. The largest component of bank profit is net interest income (3.89% of total

asset). Furthermore, non-interest operating expenses born by banks are relatively

higher than non-interest operating income so that net non-interest operating

income is negative (-2.32%). Therefore, total bank’s net operating income is only

around 1.57%. After added by non-operating income subtracted by taxes, bank net

profit compared to total assets (ROA) is around 1.25%.

ROA of representative bank in Indonesia is relatively higher compared to

ROA in India (0.84%) and OECD countries (0.8%). Apart from higher total profit,

the high percentage of ROA in Indonesia is also caused by relatively lower tax rate

issued by banks in average (in Indonesia only around 23% while in other countries

33%).

Using the balance sheet and income statement of aforementioned

representative bank, a simulation is conducted on the impact of 1% CAR regulation

increase policy on bank interest rate spread (Table 5). There are two approaches: (i)

if banks do not increase interest rate and ROE declines and (ii) if banks maintain

ROE by increasing interest rate. The first approach is illustrated in column B and C.

Column A is the initial value before there are changes in capital policy whose

figures come from the balance sheet and income statement of representative bank.

Column B is the amount of change which happens when capital experiences an

increase of 1%. Column C is the value of components after having a capital

increase of 1%. In column B can be seen that with RWA of 54.03% of total assets, a

capital increase of 1% affects the increase of total equity of 0.54% of total assets.

Assuming the number of total assets does not change, capital increase allows

banks to reduce the amount of loans with the same value as the total capital

increase. The decrease in loans affects the decline in interest expense of 0.03% so

21

there is an increase in current year profit of 0.03%. After subtracted by taxes, net

profit has an increase of 0.02% to 1.24%. Despite net profit is becoming higher,

due to an increase in total capital to 14.84%, bank ROE decreases 0.15% to 8.39%.

Next, calculation using the second approach is illustrated in column D and

E. Column D is the change in every component if there is a capital increase.

However, ROE is returned to the early value. Column E shows how banks can

maintain ROE decline by increasing interest rate spread. As an effort to maintain

and restore ROE to its initial value, net profit must have an increase of 0.05%.

Current year profit rises to 1.27% (up by 0.06%). Assuming there is no change in

net non-interest operating income and net non-operating income, the amount of

interest income needed to achieve the profit is 8.68%. With total credit amounting

to 49.84% of total assets, the increase in lending spreads needed to achieve the

interest income is 6 basis points (bps). Because the relation of capital increase

impact calculations using this method is linear, every 1% CAR increase will cause

lending spread increase with a multiplication of around 6 bps. The impact of

capital increase of 2% will cause lending spread increase of around 11.56 bps.

Analysis above is made under the assumption that banks do not want an

ROE decline and interest rate to change. The assumption is very conservative

because supposedly with higher capital, bank risks to default become lower. With

lower risks, ROE expectation targeted by banks should become lower. Loan interest

rate can also drop because the parties lending to banks see that bank risks are

lower. Related to the reasoning, there is an additional simulation, that is if ROE

and loan interest rate are assumed to have a decline of 5, 10, and 15 bps for every

increase of 1 pp capital regulation. Table 5 shows that lending spread increase will

not be as big as when ROE and interest rate are assumed to be unchanged. If ROE

and loan interest rate decline 5 bps for every 1pp increase of capital regulation,

lending spread will have an increase of 3.9 bps. The bigger the decline of ROE and

loan interest rate, the lower the increase of lending spread.

Table 5. Simulation on Impact of 1% Capital Regulation Increase

Without interest spread increase

With interest spread increase

(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes

Total capital of MCR/RWA 21.99 1 23 1 RWA 54.03 0 54.03 0 Total Capital 14.30 0.54 14.84 0.54 14.84

22

Table 5. (continued)



(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes

Liabilities 1.57 -0.54 1.03 -0.54 Interbank liabilities 4.02 0.00 4.02 Total Liabilities 5.59 Lending spreads increase 0 0.06% Interest income 8.65 0.00 8.65 0.03 8.68 - interest expense 4.80 -0.03 4.77 -0.03 4.77

= net interest income 3.85 0.03 3.88 0.06 3.91 Non-interest operating income 1.77 0.00 1.77 0.00 1.77 - non-interest operating expenses 4.08 0.00 4.08 0.00 4.08

= non-interest operating net income -2.32 0.00 -2.32 0.00 -2.32 Non-operating income 0.32 0.00 0.32 0.00 0.32 - non-operating expenses 0.27 0.00 0.27 0.00 0.27

= net non-operating income 0.05 0.00 0.05 0.00 0.05 Current Year Profit 1.59 0.03 1.619 0.06 1.65 NET PROFIT 1.22 0.02 1.244 0.05 1.27 Return on Equity 8.54% -0.15% 8.39% 0.00% 8.54%

Table 6. Impact of Capital Regulation Increase on Interest Rate Spread Increase (in bps)

Capital requirement addition

(percentage)

No changes in ROE or loan

interest

Decline of ROE and loan interest of 1pp per capital requirement increase

5bps 10bps 15bps

+1 5.78 3.90 2.02 0.14

+2 11.56 7.77 3.97 0.17

+3 17.35 11.69 5.94 0.20

+4 23.13 16.32 8.59 0.87

+5 28.91 20.91 11.18 1.44

+6 34.69 25.48 13.70 1.91

4.3 Simulation Result of Representative Bank Based on BUKU

To see impact variations on capital increase to lending spread of Indonesian

banking to interest rate spread of every bank category, there is a compilation of

balance sheet and income statement of representative bank based on BUKU (can

be seen in appendix). The difference in composition of balance sheet and income

statement of banks also causes capital increase impact to every BUKU varies.

23

Table 7. Simulation on Impact of 1% Capital Regulation Increase to BUKU 1 Banks



(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes

Total capital of MCR/RWA 22.28 1 23 1 RWA 54.88 0 54.88 0 Total Capital 14.22 0.55 14.77 0.55 14.77 Liabilities 0.55 -0.55 0.00 -0.55 Interbank liabilities 4.90 0.00 4.90 Total Liabilities 5.46 Lending spreads increase 0 0.01% Interest income 10.45 0.00 10.45 0.01 10.45 - interest expense 5.90 -0.05 5.85 -0.05 5.85







(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes




= net non-operating income 0.07 0.00 0.07 0.00 0.07

24




(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes

Current Year Profit 1.83 0.03 1.855 0.06 1.89 NET PROFIT 1.38 0.02 1.403 0.05 1.43 Return on Equity 8.33% -0.16% 8.18% 0.00% 8.33%




(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes








(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes


25




(A) Initial value

(B) Changes

(C) After Changes

(D) Changes

(E) After Changes




Based on calculation results from Table 7 to Table 10, it can be seen that a

1% increase in capital requirement regulation provides different impact to every

BUKU. If banks do not increase interest rate spread, capital regulation increase of

1% will cause a big ROE decline (-1.18%) to BUKU 4 banks. Meanwhile, the lowest

ROE decline is experienced by BUKU 1 (-0.04%). Furthermore if banks respond by

increasing lending spread, the amount of lending spread increase will be highly

sensitive to the amount of ROE decline. BUKU 1 will make the least lending spread

increase (0.01%), while BUKU 4 will increase lending spread the biggest (0.32%).

According to King (2010) there are several factors which affect the difference

in lending spread increase among others are proportion of credit/total asset,

difference of RWA/total asset, and difference of banks’ initial ROE. Therefore, this

is the comparison of those variables for the banking industry, every bank BUKU

and the result obtained from reference paper.

Table 11. Comparison of Factors Affecting Lending Spread Difference

Credit/Asset RWA/Asset ROE Lending Spread (bps) Agregate 49.84 54.03 8.54 5.78 BUKU1 53.09 54.88 7.94 1.27 BUKU 2 48.05 55.27 8.33 7.41 BUKU 3 49.54 51.77 11.51 10.53 BUKU 4 35.74 40.26 22.03 32.18 Reference Paper King 51.6 53.33 15.5 15.0 Swamy 53.23 65.77 15 11.40

26

Plot from the variable relations to change in lending spread is presented in

this graphic below.

Figure 9. Plot of Factors Affecting Lending Spread Difference

Based on the plot above, can be seen that variables which become

differentiator of the amount of lending spread change needed is ROE variable. In

general, the higher a bank’s ROE the higher interest rate spread change due to

capital regulation increase.

4.4 Econometric Estimation Result

Econometric testing is conducted to add analysis on impact of capital

regulation change on credit interest rate and is expected to be beneficial in the

formulation of Financial Macro-econometric Model (FMM) framework being

compiled. There are two alternatives for model used: using fixed effect panel data

and random effect panel data. Fixed effect panel data is used to accommodate the

change in behavior among individual banks as assumed in FMM, while random

effect panel data is used because based on Hausman testing it is concluded that

the method is preferable to be used. The results of the two methods are relatively

similar.

27

Table 12. Estimation Result on Impact of Capital Regulation on Credit Interest Rate

Variable Fixed Effect Random Effect

C 9.21*** 9.18***

Deposit interest rate (-1) 0.65*** 0.65***

NPL (-1) 0.07*** 0.07***

Change of CAR regulation (-3) 0.15*** 0.15***

Based on the estimation result can be seen that the impact of CAR

regulation changes to interest rate is relatively small and takes time about three

quarters. With cateris paribus assumption, 1% of CAR regulation change will cause

a credit interest rate increase of 0.15%.

28

V. CONCLUSION AND RECOMMENDATION

5.1 Conclusion

This research provides initial calculation on the impact of capital

requirement policy change on bank interest rate spread. Several conclusions which

can be obtained are as follows.

1. The research shows that 1% increase of CAR ratio can be covered by increasing

interest rate spread by 6 basis points (bps). The calculation result is obtained

on assumption that return on equity (ROE) and bank lending cost do not

change as well as there are no changes in total assets and bank non-operating

expenses. If ROE and loan expenses are assumed to change, the impact to

interest rate spread will become smaller.

2. Using the same method for representative bank based on BUKU, it is obtained

that BUKU 1 needs the least lending spread increase (1 bps), followed by BUKU

2 (7 bps), BUKU 3 (11 bps), and BUKU 4 needs the highest lending spread

increase (32 bps). Factor affecting the difference in impact of capital

requirement regulation increase is the current bank ROE. The higher an ROE,

the higher the increase of interest rate spread needed.

3. Additional analysis using panel data econometric method gives result that the

impact of CAR regulation change on interest rate is relatively small and needs

time around three quarters. With cateris paribus assumption, 1% CAR

regulation change will cause a credit rate increase of 0.15%.

4. Related to benefit of this research for the improvement of FMM framework, it

can be concluded that CAR can be considered as independent variable in the

estimation of interest rate spread despite the impact is relatively small.

5. Overall, this research result is in line with previous researches conducted in

other countries as explained in the literature study. However, the impact of

capital requirement ratio increase in Indonesia (6 bps) is relatively smaller than

in OECD countries (15 bps) and in India (11.4 bps). It is considered that ROE of

representative bank in both countries is relatively higher than in Indonesia.

29

5.2 Recommendation

This research is an initial step to estimate bank response to changes in

capital requirement in a practical but acceptable approach hence it has limitations.

The main limitation is assumption that cost increase due to capital increase can

only be transmitted to customers through credit interest rate increase. Related to

the limitations, there are several recommendations which can be used in future

researches, especially when regulators want to implement new capital requirement

policy, as follows.

(1) Conducting survey to banks on their response/strategy of the new

requirement regulation implementation plan based on Basel III. From the

survey actual response from banks can be analyzed such as reducing deposit

interest rate, making asset realocation, or reducing operating expenses.

(2) Performing backtesting analysis to individual bank response on the change in

capital requirement regulation enacted in 2012Q4. This can be done by

analyzing changes in components of balance sheet, income statement, as well

as bank performance after the enactment of new regulation.

Related to the improvement of FMM framework, this research recommends

to include CAR variable in conducting interest rate estimation.

30

REFERENCE

Dewati, Wahyu et. al. 2009. “Revisiting Transmisi Kebijakan Moneter di Indonesia: Bukti Empiris dengan pendekatan VAR dan Panel Data”. Working Paper Bank Indonesia

Elliott D J. 2010.”Quantifying the effects on lending of increase capital requirements”. The Brookings Institutions, 21 September.

Gunadi I, Deriantino E dan dan Budiman. 2011. “Increasing Banking Capital for Promoting Financial Stability and Banking Response to Monetary Policy: Evidence from Indonesia”. Working Paper Bank Indonesia

King, Michael R. 2010.”Mapping Capital and Liquidity Requirements to Bank Lending Spreads”. BIS Working Papers No. 324 November 2010.

Modigliani, F and Merton H. Miiler. 1958. “The Cost of Capital, Corporation Finance and the Theory of Investment” The American Economic Review, Vol. 48, No. 3 (Jun., 1958), pp. 261–297

Purwanto, M. Noor Adhi.2009. “Faktor-Faktor Penentu Spread Suku Bunga Bank”. Occasional Paper Bank Indonesia

Repullo R and Suarez J. 2004.”Loan Pricing under Basel Capital Requirements”, Journal of Financial Intermediation 13(4): 496–521.

Ruthenberg D and Landskroner Y. 2008. “Loan Pricing under Basel II in an Imperfectly Competitive Banking Market”, Journal of Banking and Finance 32: 2725–2733.

Swamy, Vighneswara. 2014. “Modelling the Impact of New Capital Regulations on Bank Profitability”. MPRA Paper No. 58298 September 2014.

31

APPENDIX

Capital Requirement Regulation Change in Indonesia

Bank Indonesia Regulation

Article Period in Effect MCR

No 3/21/PBI/2001 Article 2 Clause (1) 2001q4 – 2008q3 8% of RWA

No 10/15/PBI/2008 Article 2 Clause (1) 2008q4 – 2012q3 8% of RWA

No 14/18/PBI/2012 Article 2 Clause (3) 2012q4 – 2013q3 8% of RWA – with adds on according to risk profile

No 15/12/PBI/2013 Article 2 Clause (3) 2013q4 - current 8% of RWA – with adds on according to risk profile

32

Balance Sheet and Income Statement of Representative Bank of Each

BUKU

BUKU 1

(in percentage to total assets, unless stated otherwise) Balance Sheet 2010 2011 2012 2013 2014 Average Cash and placement to BI 18.23 19.00 15.54 12.51 13.27 15.71 Interbank Placement 6.65 6.20 6.23 4.90 5.33 5.86 Securities 6.56 6.87 6.43 6.88 7.22 6.79 Credit 51.42 50.85 53.08 55.89 54.21 53.09 Other assets 17.15 17.07 18.72 19.82 19.97 18.55 Total assets 100.00 100.00 100.00 100.00 100.00 100.00 Third Party Funds 62.26 62.96 61.17 60.66 61.64 61.74 Interbank liabilities 4.54 4.83 5.76 5.04 4.35 4.90 Liabilities to BI 0.02 0.01 0.00 0.05 0.00 0.01 Issued securities, spot, and derivative 0.82 0.71 0.83 0.70 0.75 0.76 Loans 0.55 0.68 0.59 0.48 0.47 0.55 Other liabilities 16.32 16.08 17.78 19.05 19.83 17.81 Total Liabilities 84.50 85.25 86.13 85.98 87.04 85.78 Total Equity 15.50 14.75 13.87 14.02 12.96 14.22 Adjusted Equity 0.00 0.00 0.00 0.00 0.00 0.00 Total Equity 15.50 14.75 13.87 14.02 12.96 14.22 Total Liabilities and Total Equity 100.00 100.00 100.00 100.00 100.00 100.00 RWA/Total Asset 55.50 55.31 53.68 55.70 54.23 54.88 MCR/Total Asset 16.46 13.98 12.99 13.23 11.61 13.65 MCR/RWA 29.65 25.27 24.20 23.75 21.4 24.87 MCR/RWA Average (after excluding outlier)

25.20 24.04 21.82 20.86 19.48 22.28

Income Statement 2010 2011 2012 2013 2014 Average Interest Income 10.76 10.05 10.00 10.33 11.09 10.45 Interest Expense 5.59 5.56 5.61 5.79 6.93 5.90 Net Interest Income 5.28 4.58 4.47 4.60 4.20 4.55 Non-Interest Operating Income 1.33 1.00 0.94 0.68 0.65 0.92 Non-Interest Operating Expense 5.15 4.08 3.94 3.83 3.69 4.14 Net Non-Interest Operating Income -3.82 -3.09 -3.01 -3.16 -3.04 -3.22 Net Operating Income 1.46 1.50 1.46 1.44 1.16 1.33 Non-Operating Income 0.44 0.44 0.37 0.40 0.37 0.40 Non-Operating Expense 0.47 0.35 0.33 0.32 0.34 0.36 Net Non-Operating Income -0.03 0.09 0.04 0.08 0.03 0.04 Total Profit (current year profit) 1.42 1.59 1.50 1.53 1.19 1.44 Current year tax 0.32 0.36 0.33 0.32 0.25 0.32 Net Profit 1.11 1.23 1.18 1.20 0.93 1.13 ROE 7.14 8.32 8.48 8.58 7.18 7.94 Tax Rate 22.35 22.60 21.67 21.13 21.51 21.87

33

BUKU 2


23.62 23.53 24.03 22.84 24.93 23.79

Income Statement 2010 2011 2012 2013 2014 Average Interest Income 8.18 7.69 7.46 7.48 8.06 7.77 Interest Expense 4.18 4.14 4.04 3.97 4.65 4.20 Net Interest Income 4.00 3.55 3.41 3.51 3.41 3.57 Non-Interest Operating Income 2.48 2.22 2.05 2.76 3.08 2.52 Non-Interest Operating Expense 4.46 4.04 3.81 4.63 4.70 4.33 Net Non-Interest Operating Income -1.98 -1.82 -1.77 -1.87 -1.62 -1.81 Net Operating Income 2.02 1.73 1.65 1.64 1.79 1.76 Non-Operating Income 0.20 0.16 0.14 0.25 0.15 0.18 Non-Operating Expense 0.14 0.08 0.09 0.13 0.14 0.12 Net Non-Operating Income 0.06 0.09 0.05 0.12 0.02 0.07 Total Profit (current year profit) 2.07 1.82 1.70 1.76 1.80 1.83 Current year tax 0.51 0.43 0.41 0.44 0.44 0.45 Net Profit 1.57 1.38 1.29 1.32 1.36 1.38 ROE 8.44 8.80 8.35 7.56 8.59 8.33 Tax Rate 24.44 23.79 24.24 24.81 24.46 24.35

34

BUKU 3


20.03 17.09 17.34 17.52 17.65 17.93

Income Statement 2010 2011 2012 2013 2014 Average Interest Income 7.37 7.21 6.66 6.98 8.07 7.26 Interest Expense 4.26 4.27 3.76 4.14 5.18 4.32 Net Interest Income 3.11 2.95 2.90 2.84 2.89 2.94 Non-Interest Operating Income 2.70 2.13 1.62 1.99 1.86 2.06 Non-Interest Operating Expense 4.32 3.65 3.01 3.39 3.47 3.57 Net Non-Interest Operating Income -1.62 -1.52 -1.39 -1.40 -1.61 -1.51 Net Operating Income 1.49 1.43 1.51 1.44 1.28 1.43 Non-Operating Income 0.50 0.63 0.52 0.57 0.54 0.55 Non-Operating Expense 0.50 0.52 0.46 0.52 0.55 0.51 Net Non-Operating Income 0.00 0.12 0.06 0.05 -0.01 0.04 Total Profit (current year profit) 1.49 1.54 1.57 1.49 1.27 1.47 Current year tax 0.32 0.36 0.37 0.34 0.28 0.34 Net Profit 1.17 1.18 1.19 1.15 0.98 1.14 ROE 12.13 12.08 12.76 11.62 9.22 11.51 Tax Rate 21.56 23.28 23.91 22.77 22.34 22.80

35

BUKU 4


16.49 14.54 15.69 15.93 17.08 15.95

Comparison of Interest Rate between BUKU

r_tpf r_interbank r_loan

Agregate 4.56% 5.01% 5.77%

BUKU 1 5.69% 6.00% 8.40%

BUKU 2 3.78% 4.45% 4.58%

BUKU 3 4.12% 4.63% 4.83%

BUKU 4 2.73% 2.83% 6.35%

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