TEXT-Fitch: Major Indonesian Banks Can Withstand Stress

Wed Jan 30, 2013 8:06pm EST

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Link to Fitch Ratings' Report: Indonesian Banks’ Stress Test; Well Buffered Against Rising Operating Risks

JAKARTA/SINGAPORE, January 30 (Fitch) Fitch Ratings says Indonesia's major banks are able to withstand stress, largely due to their strong loss-absorption qualities and/or tangible parental support. Therefore, the Rating Outlook for most domestic banks continues to be Stable, even as rapid credit growth in the country over the past three years has led to a build-up of asset quality risk on the local banking sector.

Most major Indonesian banks have superior margins and profitability relative to other banking systems in emerging markets, providing them with a strong buffer against potential impairment risks. Under a stress test conducted by Fitch, Indonesia's nine major lenders are estimated to incur, on average, loan losses of 3.8% of their loans, but which will be comfortably covered by their pre-provision profits - that Fitch has also stressed downwards - which equalled 5.2% of loans. Under normal economic cycles over the past five years, loan losses have ranged between 1% and 2% of loans, while pre-provision profits equalled 6%-7% of loans.

Fitch's stress test reveals that the major domestic banks show varying degree of resilience and vulnerability, which is broadly captured in their Viability Ratings (VR). Larger, systemically important Indonesian banks are able to cope with "stressed" losses with their steady core earnings alone. Medium-sized banks' weaker loan loss tolerance is reflected in their lower VRs, although downside risks are mitigated by ordinary support from their higher-rated foreign parent banks.

Fitch stress tests also found that, with earnings fully covering loan losses in a stress environment, capital would likely remain intact for most major Indonesian banks. The combined Tier 1 capital, which is composed entirely of high-quality common equity, of these banks stood at an average 14% of risk-weighted assets at end-H112 - one of the highest among banks in Asia-Pacific.

Fitch points out that the outcome of the stress test does not represent the agency's base-case forecast for the Indonesian banks - which are expected to remain very profitable on the back of stable economic growth in Indonesia. Fitch's forecast is for Indonesia's GDP to continue growing 6% in 2013. Moreover, the stress test gives little benefit to banks' likely preventive measures that could help arrest asset quality deterioration and support recoveries and costs savings in a distressed scenario.

The report titled "Indonesian Banks' Stress Test" is available on www.fitchratings.com or by clicking on the link above.

The ratings of Fitch-rated nine major Indonesian banks are:

PT Bank Mandiri (Persero) Tbk:

- Long-Term Issuer Default Rating (IDR) at 'BBB-'; Outlook Stable

- Viability Rating at 'bb+'

PT Bank Rakyat Indonesia (Persero) Tbk:

- Long-Term IDR at 'BBB-'; Outlook Stable

- Viability Rating at 'bb+'

PT Bank Central Asia Tbk:

- Long-Term IDR at 'BBB-'; Outlook Stable

- Viability Rating at 'bbb-'

PT Bank Negara Indonesia (Persero) Tbk:

- Long-Term IDR at 'BBB-'; Outlook Stable

- Viability Rating at 'bb'

PT Bank CIMB Niaga Tbk:

- Long-Term IDR at 'BBB'; Outlook Stable

- Viability Rating at 'bb'

PT Bank Danamon Indonesia Tbk:

- Long-Term IDR at 'BB+' on Rating Watch Positive

- Viability Rating at 'bb+'

PT Bank Internasional Indonesia Tbk:

- Long-Term IDR at 'BBB'; Outlook Stable

- Viability Rating at 'bb'

PT Bank Pan Indonesia Tbk:

- Long-Term IDR at 'BB'; Outlook Stable

- Viability Rating at 'bb'

PT Bank OCBC NISP Tbk:

- Long-Term IDR at 'BBB'; Outlook Stable

- Viability Rating at 'bb'

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