(The following statement was released by the rating agency)
JAKARTA/SINGAPORE, February 12 (Fitch) Major Indonesian banks'
profitability should remain healthy this year, following a solid
performance in 2013, says Fitch Ratings. Strong margins and high
capitalisation insulate the banks against potentially heightened
volatility and the risk of a macroeconomic shock.
The economy remains somewhat vulnerable to external events,
though local markets
have performed relatively well since the onset of Fed tapering.
balances continue to improve gradually, helped by policy
tightening - as
illustrated by the recent shift in the trade balance into a
surplus. In light of
this adjustment process, we expect GDP growth to slow to 5.3%,
from 5.8% in
Against this backdrop, we expect NPLs to rise from their
historical lows of
around 2% in 2013. Key risks stem from rising interest rates and
effects of weaker commodity prices and more challenging
However, problem assets at major Indonesian banks should remain
manageable, supported by the pro-active moves by some banks -
heightened vigilance of vulnerable borrowers, and restructuring
The potential increase in banking stress should be comfortably
robust interest margins and profitability. Both of these remain
highest in Asia, and should limit the risk of any capital
Indonesia's banking system booked strong profitability in 2013
with ROA at
around 3%, despite a slight dip in net interest margin.
Notwithstanding a modest
increase in pressure, we still expect Indonesian banks to
profitability than most other banking systems in the region, as
they still have
a wide margin to compensate for pressures from higher funding
and credit costs.
This was also confirmed by our stress tests of rated banks in
Indonesian banks' capital position has remained strong, with the
Tier 1 capital
ratio improving slightly to 16.99% in the first 11 months of
2013 (2012: 15.6%).
Any prospective pressure on capital is counterbalanced by higher
retention, lower loan growth targets and, at some banks, equity
Deposit competition and higher interest rates may hamper
efforts, and could squeeze the liquidity of smaller banks with a
franchise. But funding is likely to remain sourced mainly from
deposits. The loan/deposit ratio climbed to nearly 90% in 2013,
but the pace
should ease somewhat as loan growth is likely to moderate to
around 15% in 2014,
down from 20%.
Since the Asian Financial Crisis of 1997-1998, major Indonesian
generally been selective in extending foreign-currency (FC)
loans, focusing on
borrowers which generate income in matching foreign currencies,
with the FC
loans/deposit ratio of the banking sector staying below 100%.
foreign-currency net open position exposure of the banking
sector has averaged
2% of capital, well below Bank Indonesia's limit of 20%. This
capital impairment led by sharp depreciation of the rupiah,
which has fallen by
more than many other Asian currencies since mid-2013.
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The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
2014 Outlook: Asia-Pacific Banks
Indonesian Banksâ€™ Stress Test
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