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Indonesias banks stronger and more diversified | Financial Services | Indonesia | Oxford Business Group

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Economic Update
Indonesias banks stronger and more diversified
Indonesia | 26 Aug 2013

After several years of strong credit growth in Indonesia, recent interest rate increases are expected to slow lending, allowing banks to take stock and reducing the risk of exposure to bad loans. Ratings agency Fitch has said that Indonesias 50-basis-point hike in interest rates on July 11 will boost the stability of the banking sector, helping decelerate lending at a time when economic growth is slowing. The rise came after a 25-point increase the previous month, a clear sign that the central bank considers restraining credit growth and inflation a priority. Fitch said that slower lending growth would help shore up banks credit profiles and allow them to unwind risks that accrued during the past few years of rapid credit expansion. For highly capitalised Indonesian banks, we believe the risks from excessive loan expansion outweigh the negative impact on profitability from rising bad debt as a result of higher interest rates, the agency said. It noted that Indonesia is one of five countries in Asia which has a macroprudential indicator (MPI) score of 3, which indicates high risk of systemic stress. MPI scores tend to rise when credit growth is high and asset prices are also increasing, with the risk of bubbles forming. Concerns about asset surges in some sectors appear well-founded. Residential real estate prices in 14 big cities grew 4.8% in the first quarter of the year over the final three months of 2012, the biggest rise in the indexs 11-year lifespan, and four times the five-year quarter-on-quarter average of 1.2%. On July 1, ratings agency Standard & Poors (S&P) issued a report suggesting that credit risks were indeed growing. S&P pointed towards an increasing ratio of special mention loans which have been overdue for up to 90 days but have not yet become bad. Special mention loans have been on the rise since 2011, a sustained period, suggesting that borrowers are increasingly finding it difficult to meet repayment terms. In turn, this could herald increases in non-performing loans (NPLs) and defaults, affecting bank balance sheets. "The main threat to asset quality stems from increased leverage in the private sector, aggressive regulatory measures to promote economic growth, and structural weaknesses in the banking industry, S&P said.
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Indonesias banks stronger and more diversified | Financial Services | Indonesia | Oxford Business Group

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S&P also reported that NPLs had fallen to 1.9% this year respectable by most international standards from 6.1% in 2006; however, this should be seen in the context of rapid new loan growth, rising incomes and lower interest rates. Indonesia, like many of its neighbours, learned some lessons from the 1997-98 Asian financial crisis, which came after several years of rapid economic and asset growth. Fitch notes that Indonesian banks have substantial capital buffers and provisioning coverage, in addition to ample capacity to generate retained earnings all of which should help them weather shocks to the banking system and moderate rises in NPLs. Fitch also praised Bank Indonesia (BI) for monetary tightening measures that have helped bolster the broader banking system against shocks. These included raising down payment conditions for home and motor loans last year. We believe the central bank's proposal to tighten mortgage lending regulations together with the interest rate hikes should take the steam out of the property market, the agency said. The BI, under new governor Agus Martowardojo, may move to raise rates further later in the year if inflation looks likely to overshoot its 7.8% target. Inflation is a significant risk factor for Indonesia, its corrosive effect on earnings and savings being a challenge for policymakers in what is otherwise becoming a stable economy. While the central bank is moving to reduce credit growth in certain areas, it is also supporting the expansion of loans to small and medium-size enterprises (SMEs). In January BI issued a regulation requiring all lenders including foreign and joint venture banks to direct 20% of their loan book to SMEs by 2018, with interim minimums set along the way. Foreign banks, which lack extensive branch networks and are mainly focused on corporate and consumer credit, may find it difficult to comply with the new rule. However, Indonesia remains an attractive emerging market for international lenders. It has a population of almost 240m, one of the lowest banking penetration rates in the region, strong domestic demand that has powered growth during a period of uncertainty for the global economy, and political stability. For banks that are able to serve untapped niches such as SMEs, microcredit and sharia-compliant finance Indonesia shows promise.

MORE LIKE THIS Indonesia: Banking grow th Diversifying funding sources: Corporate bonds are becoming more popular in locally based banks A crow ded retail market: Competition gets more intense as banks expand access and services Mongolia responds quickly to banks insolvency Papua New Guinea: Banks eye rural areas for grow th

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THE REPORT: COLOMBIA 2013 Outperforming the majority of its regional peers, Colombia has experienced steady economic grow th in the past decade registering GDP grow th averaging over 4%, a rate set to continue in 2013. Read more

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