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
possible downgrade, in line with Moody's initiative toreview governments'
abilities to provide support to their bankingsystems, as detailed in the May
2009 report, "Financial Crisis MoreClosely Aligns Bank Credit Risk and
Government Ratings in Non-AaaCountries."
Originally published by Info-Prod Strategic Business Information.
(c) 2009 Info-Prod Research (Middle East). Provided by ProQuest LLC. All rights
Reserved.
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