JAKARTA (TheInsiderStories)—Moody’s Investors Service has changed its outlook for the Indonesian banking system to stable from positive following the rating upgrade of the sovereign and many rated banks during April-June 2018.
Moody’s Vice President and Senior Analyst Simon Chen said in a press release on Tuesday (7/8) that the stable outlook reflects Moody’s assessment that over the next 12-18 months, banks in Indonesia will show stabilizing asset quality in a robust macroeconomic environment.
“During this period, the banks will also demonstrate large loss-absorbing buffers, underpinned by their strong profitability,” he added.
Moody’s decision to change the outlook for the banking system to stable also follows its upgrade of the rating of the Indonesian sovereign and many rated banks to Baa2 from Baa3 with a stable outlook in April 2018 and the change in the rating outlook to stable from positive, as well as the upgrade of the baseline credit assessments for seven of the nine rated banks during April-June 2018 period.
The stable outlook for the banking system is based on Moody’s assessment of six drivers: operating environment (stable); asset risk (stable); capital (stable); funding and liquidity (stable); profitability and efficiency (stable); and government support (stable).
Strong economic growth will support the operating environment for banks over the next 12-18 months. In particular, macroeconomic policies will lead to real GDP growing 5.2% annually in 2018-19, after 5.1% expansion in 2017.
And, loan growth will accelerate to 10%-12% annually during this outlook period from 8.2% in 2017.
Asset quality will broadly stabilize over the next 12-18 months, as a stronger economy drives corporate revenue growth. The formation rates of new nonperforming loans and restructured loans will remain far below their 2016 peaks after sharp declines in 2017.
Robust internal capital generation will keep capitalization at current strong levels. Specifically, the banks’ robust revenue growth and declining credit costs will enable them to generate sufficient capital to support accelerating asset growth.
Moody’s points out that the system’s Tier 1 capital ratio, which exceeded 20% at the end of May 2018, is well above those of other Asian systems.
On liquidity, deposit growth will mitigate funding pressure. While faster loan growth will pressure the banks’ funding levels with loan-to-deposit ratios at some banks rising, the potential tightening of funding will be modest because deposits will expand at a similar pace, supported by corporate revenue growth.
In addition, the banks’ core profitability will remain strong, supported by wide net interest margins of around 5%, which is well above their regional peers.
Government support will stay strong. Moody’s explains that its upgrade of Indonesia’s sovereign rating in April 2018 reflects the government’s improved capacity to support the banks. Moreover, the financial safety net law provides a sound legal basis and framework for the government to extend support.
Moody’s rates nine banks in Indonesia namely PT Bank Rakyat Indonesia (BRI), PT Bank Mandiri, PT Central Bank Asia (BCA), PT Bank Negara Indonesia (BNI), PT Bank Tabungan Negara (BTN), PT Bank CIMB Niaga, PT Pan Indonesia Bank, PT Bank Danamon Indonesia, PT Bank Permata. These banks accounted for 66% of total system assets at the end of March 2018.
The nine banks already release its financial report for the first semester this year. BNI recorded highest loan growth at 18.5 percent (year on year) or Rp191.47 trillion in the semester this year, followed by BRI that booked 15.19 percent loan growth at Rp758,96 trillion in the first half of 2018.
Furthermore, BCA recorded 14.2 percent (yoy) loan growth at Rp494.46 trillion, followed by BNI’s loan growth that grew 10.94 percent (yoy) at Rp431.86 trillion in the first semester of this year.
Meanwhile, BRI recorded highest net income at Rp14.55 trillion in the first semester of 2018, a 8.23 percent rise from Rp13.44 trillion in the same period previous year.