September 14, 2017 / 7:29 AM / a year ago

Fitch: Modest Impact on Large Indonesian Banks as Relaxed Regulation Expires

(The following statement was released by the rating agency) JAKARTA, September 14 (Fitch) The impact on the large Indonesian banks from the expiry of relaxed regulation on loan restructuring and risk-weighting of certain asset classes will be modest, says Fitch Ratings. This is because many of the large banks did not adopt the relaxed rule and, of those that did (mainly the state-owned banks), most applied it on a restricted basis. The regulation, introduced by the Indonesian Financial Services Authority (OJK) in August 2015 for a two-year period, expired on 24 August 2017. The change was introduced during a period of increased pressure on asset quality at the Indonesian banks, primarily as a result of the collapse in commodity prices, which was reflected in an increase in the industry's average NPL ratio to 3.0% at end-1H17, from 2.2% at end-2014. The worsening NPL ratio hobbled loan growth, as banks tightened underwriting standards and focused on managing problem loans. Loan restructuring by the 11 largest banks by assets, carried out under both the relaxed and normal rules, rose significantly to average 5.7% of their total loans at end-1H17, from 2.2% at end-2014. Under the relaxed restructuring rule, banks could restructure non-performing and potentially problematic loans of up to IDR20 billion (USD1.5 million) each by taking into account only an assessment of the borrower's ability to repay the loan. This was less onerous for banks than under the normal (and now reinstated) rule that required them to also undertake borrower and industry-specific analysis before restructuring the loan. Based on data provided by most of the large banks, Fitch believes the expiry of the relaxed regulation, which may raise the large banks' average NPL ratio by around 12bp, will not have a material impact. Our view of their asset quality profiles would not change, even if we take into account some increase in their "special-mention" loan ratios as well, because we already factor restructured loans (in particular, restructured loans classified as "current") into our assessments. The reversion to the old rule on restructuring should not have a significant impact on the industry going forward as we expect most of the large banks to undertake significantly less restructuring in 2H17, as asset-quality pressures ease due to a gradually improving operating environment. OJK also allowed assets under insured-credit programmes to qualify for lower risk-weighting, which was aimed at stimulating loan growth under these programmes. For example, the risk-weighting on subsidised mortgages could be reduced to as low as 20% from the Indonesian regulatory standard of 35%. With the expiry of the relaxed regulation, all subsidised mortgages (both new and those previously applied at a lower weight) will be risk-weighted at 35%. State-owned PT Bank Tabungan Negara (Persero) Tbk (BTN, AA(idn)/Stable), which applied the lower risk-weighting to its mortgage loans, will be most affected by the end of the relaxed regulation as around 36% of its loan portfolio consists of subsidised mortgages. Data from the bank showed the higher risk-weighting could result in a one-time 1pp reduction in its Tier-1 capital ratio to around 14% (1H17: 15.1%). However, its Tier-1 ratio would still remain well-above its minimum requirement. Fitch has already factored the application of the higher risk-weighting into our assessment of the bank's capitalisation. Furthermore, there is no impact to BTN's National Rating as it is driven by our expectation of extraordinary state support, in case of need. The rest of the large banks should be largely unaffected by the expiry of the relaxed rules on risk-weighting for mortgages. Contact: Priscilla Tjitra Associate Director +62 21 2988 6809 PT Fitch Ratings Indonesia DBS Bank Tower, 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta, 12940 Gary Hanniffy, CFA Director +62 21 2988 6808 Iwan Wisaksana Director +62 21 2988 6807 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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