3/4/2018/Fitch Ratings
The operating environment facing Indonesian banks is gradually improving, driven by steady economic performance, easing conditions in the commodity sector and macroeconomic policies consistently geared towards maintaining stability, says Fitch Ratings. These trends are helping to stabilise banks’ asset quality, and could have positive rating implications for some Indonesian banks, if sustained. Almost 70% of attendees at our Indonesia Credit Briefing in Jakarta on 22 March expected asset quality to improve in 2018.
Indonesia is benefiting from stronger global trade and the stabilisation of commodity prices. Investment is also set to gain further momentum due to the government’s ambitious plans for infrastructure development. We expect GDP growth to accelerate to 5.3% in 2018 and 5.5% in 2019, from 5.1% in 2017.
Bank lending growth should strengthen slightly along with the economic pick-up and in response to Bank Indonesia’s (BI) two policy rate cuts last year. Almost half of the conference attendees expected a hike in policy rates this year, but we think BI will wait until 2019 before tightening. Meanwhile, the government’s infrastructure drive should support loan demand, given that projects will be financed only partly through the budget, with a large funding gap left to be filled by state-owned enterprises and private companies.
We expect loan growth to pick up to around 10% in 2018, from 8% in 2017. This would still be well below the loan growth rates of more than 20% of earlier in the decade, and which contributed to subsequent asset-quality problems. Banks are likely to remain relatively cautious, particularly towards the mining sector, given the rise in NPLs caused by the commodity-price collapse in 2015-2016.
The impact of that commodity sector downturn on Indonesian banks has now largely played out. The latest results showed that asset-quality pressures started to ease during 2017, with the average NPL ratio falling to 2.6% by end-2017 from a peak of 3.2% earlier in the year. ‘Special mention’ and restructured loan ratios showed signs of stabilisation, following marked increases in previous years. Lower credit costs and some efficiency improvements more than offset the effects of modestly narrower net interest margins and slow loan growth, pushing up the average return-on-assets to 2.0% in 2017, from 1.8% in 2016.
Meanwhile, macroeconomic risks faced by banks appear to have receded as policymaking has increasingly focused on stability, particularly bolstering resilience to external shocks. These policies led us to upgrade the sovereign rating to ‘BBB’ in December 2017, and should put Indonesia in a better position to cope with further normalisation of US monetary policy. Nevertheless, Indonesia remains more vulnerable to market pressures than most major APAC economies.
A weaker rupiah, for example, would imply higher servicing costs of foreign currency-denominated debt, which accounts for around 15% of bank loans. The solid margins and strong capitalisation of large banks act as a buffer against these risks, with their average Tier 1 ratio a healthy 19.8% at end-2017.
Attendees at the Jakarta conference showed some concern over the impact of full adoption of Basel III standards in 2019 and implementation of IFRS 9 accounting standards in 2020. Over half of respondents expected Basel III adoption to have a material impact on banks’ capital and liquidity. Our own estimates suggest most of the large banks would already meet the Basel III capital requirements, and also have ample liquidity. Almost 60% of attendees said IFRS 9 will have a negative impact on provisioning expenses and capital ratios, but we believe the impact on large banks will not be material – given their healthy profitability and capital positions.
