Moody’s Says Restructured Loan Growth Raises Asset Quality Concerns in Indonesia, Thailand

Loss Buffers Remain Strong

JAKARTA (TheInsiderStories) – Restructured loans have grown substantially in Thailand and Indonesia in recent years, underscoring high latent asset risks in the two countries, international rating agency Moody’s Investors Service stated in an in-depth report published on Thursday (08/24).

Moody’s did however add in its assessment that the banking system in both countries still has buffers against potential losses from high-risk assets.

“In particular, increases in standard restructured loans, or restructured loans that are still performing, underscore the high latent asset risks present in these two countries, although by different degrees […] However, in our view, banks in both systems for now also have ample buffers against potential losses from these assets,” Alka Anbarasu, a Moody’s Vice President and Senior Analyst, said in a statement that was also released on the same day.

Moody’s report does not consider non-performing loans (NPLs) that have been restructured because they are already included in reported NPL data, and Moody’s aim is to highlight asset risks not captured by NPL disclosures.

In Thailand, standard restructured loans jumped to a combined 2.9 percent of gross loans at nine rated commercial lenders as of end-2016, from 2.4 percent a year earlier.

In Indonesia, the ratio, also covering nine rated commercial banks, swelled to 4.6 percent at end-2016 from 3.3 percent a year earlier. As indicated, the ratios of restructured loans in both economies are substantially higher than for other ASEAN countries, such as Singapore and Malaysia.

Moody’s said this build-up in restructured loans raises asset quality concerns, more so in Thailand than Indonesia, where economic conditions are more favorable.

It added that a substantial share of such loans could turn non-performing ones in both countries; a swelling stock of restructured loans is thus a concern, although the two economies are at different stages of the credit cycle.

“Although the operating environment has somewhat improved for banks in Thailand following a multiyear economic slowdown, many small and medium-sized enterprises (SMEs) are still struggling. We believe restructured loans in Thailand are mostly for this group of borrowers, and the rapid build-up of these loans will likely continue,” the rating agency said.

Meanwhile, in Indonesia, these loans rose prominently in 2015, after the government eased rules for loan restructuring as a way to stimulate the economy.

Indonesia’s resource-rich economy is now on more solid footing, aided by a recovery in commodities prices, so growth in restructured loans will moderate and their NPL slippage rates will gradually decrease, Moody’s said.

However, the rating agency highlighted that banks in both Thailand and Indonesia have sufficient buffers against potential losses.

“Loan-loss coverage ratios in both systems were well above 100 percent at end-2016, and capital buffers are also strong,” it said, adding that in Thailand, the asset-weighted average ratio of loan-loss reserves to problem loans at rated banks was 136.8 percent at end-2016, while in Indonesia, the system-wide ratio of loan-loss reserves to problem loans at rated banks exceeded 120 percent at the end-2016.

“This [the Indonesia case] will decline to 110 percent if 25 percent of their restructured loans become non-performing, boosting their NPL ratio by 1.1 percentage points. In such a situation, if 50 percent of their restructured loans are impaired, then their NPL ratio will rise 2.3 percentage points and their problem-loan coverage will shrink to 76 percent.”