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Indonesian banks well-prepared for risks, say 'Big Three'

Publication Date : 05-02-2013


International ratings agencies say that Indonesian banks have strong capacities to withstand potential stress, although they warn that exceptionally strong lending growth in the industry has led to surging risks.

All members of the so-called “Big Three” ratings agencies — Moody’s Investors Service, Fitch Ratings and Standard & Poor’s (S&P) — are upbeat that Indonesia will remain one of the world’s most profitable and fastest-growing banking industries, despite the recent overhaul in banking regulations by Bank Indonesia (BI).

Moody’s granted Indonesia’s banking industry a “stable” outlook, expecting policymakers to retain policies that are accommodating and supportive to growth in the banking sector.

But the US-based ratings agency warned that the recent new banking regulations introduced by BI could have negative credit implications.

“In the end, the credit outlook of Indonesian banks was ‘stable’ instead of ‘positive’ because of policy risks from new regulations,” Moody’s managing director for Asia-Pacific financial institutions, Stephen Long, told a limited press briefing in Jakarta last week.

Long cited BI’s new regulation obliging banks to channel 20 per cent of their lending portfolio to small and medium enterprises (SMEs), which he described as an “erratic move that is not positive from a credit perspective”.

This year, Moody’s expected a modest squeeze in the net interest margin (NIM) among Indonesian banks due to tighter competition, although that might be offset by strong credit expansion, low credit costs and stronger fee incomes — making net profits remain steady in 2013.

Indonesia’s banking industry is currently among the world’s most profitable, with the top 10 banks having an average NIM of 6.1 per cent, almost twice their peers in Southeast Asia, as well as in China and India.

Moody’s said that credit growth would remain at a “strong” level of above 20 per cent this year, but tighter competition among Indonesian banks to collect deposits might be worth highlighting, as credit growth had outpaced deposits growth for a long time.

Greater competition for deposits meant that Indonesia’s banking industry would continue to see a rising loan-to-deposit ratio (LDR), which now already stood at its highest since the 1997 financial crisis, the ratings agency said.

Indonesian commercial banks had an average LDR of 79.43 per cent as of November last year, according to the latest BI data, increasing sharply from around 60 per cent in 2009. For banks, higher LDR translates into less liquidity, meaning the room to expand credit is more limited.

Another ratings agency, Fitch, said that Indonesia’s banking industry had a “strong buffer against potential impairment risks” compared to its peers in emerging markets, thanks to their strong loss-absorption qualities and superior profitability.

Under Fitch’s stress test scenario, such as when a banking industry suffers loan losses, the capital of major Indonesian banks remains intact, which proves the banks’ resilience to a potential banking crisis.

Nevertheless, the ratings agency cautioned that Indonesia might have already seen strong credit growth for too long. The country has enjoyed more than 20 per cent credit growth in the past three years and that “has led to a build-up of asset quality risk in the local banking sector”, according to Fitch.

S&P — the only member of the “Big Three” ratings agencies that is yet to grant Indonesia investment grade status — classified Indonesian banks as having “very high” resilience toward risks and crisis, according to its latest banking assessment released in January.

However, just like Moody’s and Fitch, S&P warns that there is high credit risk in Indonesia’s banking industry.

S&P rates Indonesia seven out of 10 in terms of riskiness in the banking sector (higher scores mean higher risks), the same category as Iceland and Ireland, the respective banking industries of which were hit by the 2008 financial crisis.


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