Moody’s Says Indonesia Banking System Outlook Negative

Moody’s Says Indonesia Banking System Outlook Negative
Date: 2009-08-11

Moody’s Investors Service says that theoutlook for the Indonesian banking system is negative over the next 12-18months, reflecting Moody’s assumptions for fundamental credit conditionsover this timeframe. “Over the next 12 months, Indonesian banks will face increasing pressures — particularly on asset quality — but will fare relatively well as thecountry’s macro-economic conditions slow, although not to the extent seenon a global basis,” says Beatrice Woo, a Moody’s Vice President andSenior Credit Officer. “Our outlook for the Indonesia banking system alsoassumes that prevailing external macro-economic conditions are notprotracted. ” Woo was speaking on the release of Moody’s latest outlook — which sheauthored — on the Indonesian banking system. The report — which iswide-ranging in its content — looks at positive and negative ratingtrends as well as key drivers, such as franchises, risk positioning, theregulatory environment, and financial fundamentals. Moody’s rates a total of 10 Indonesian banks with their foreign currencydeposit ratings all at B1, their global local currency (GLC) depositratings ranging from Baa2 to Baa3, and their bank financial strengthratings (BFSR) from D- to D+. “In the current environment, the results of rapid loan growth, averaging20% annually over the past five years, could be a potential source ofhigher credit costs, and as newly underwritten loans test the upgradedrisk management systems of the banks,” says Woo. “In some cases, banks had embarked on consumer as well assmall-and-medium- enterprise lending, new areas for them, and thereforenot without risk,” says Woo. “Furthermore, their restructured loans arevulnerable to a downturn and could become a particular problem for thestate-owned banks. In this context, the system’s non-performing loansratio inched up to 4.06% in April 2009 from 3.20% at end-2008.” “And while liquidity is less of a threat, pricing has increased, causingnet interest margins to contract; intense competition for deposits —the level of which has abated since late-2008 — has boosted the cost offunds,” says Woo. “On the other hand, bank managements have successfully navigated throughseveral difficult economic periods post-1997 crisis, and they areexpected to respond well and with experience to the current environment,”says Woo. Looking ahead, consolidation and divestment continue to pare the numberof players, but excess capacity remains. As the top 10 banks controlnearly two thirds of system deposits, the other 113 are unlikely toachieve economies of scale. As a result, tightening regulatoryrequirements will further drive consolidation. The new Moody’s report further points out the government remains theindustry’s largest shareholder, albeit much reduced, controlling 25% ofsystem assets. Overall, from a credit perspective, structuraldevelopments have been positive, and pricing discipline and marketstability should eventually return. Despite the negative industry outlook, creditworthiness — that ismanageable asset quality, modest economic capital solvency, overallprofitability and reform — will be broadly sustained. Generally,Indonesian banks are better equipped now to absorb stress, while theirmanagements have responded quickly to adverse
circumstances. Hence, the BFSR for the 10 Moody’s-rated Indonesian banks carry stableoutlooks. Their resulting fundamentals, especially capital levels, areexpected to be adequate enough for them to remain in their rating ranges.Their weighted average BFSR remains at D. For comparative purposes, theweighted average Indonesian BFSR during the 1997 financial crisis was Eagainst a pre-crisis D. As for their credit ratings, the Indonesian banks’ GLC deposit ratings are on review for

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