Fitch: Most Large Indonesian Banks Resilient in a Challenging Environment
Fitch expects loss-absorption cushions to remain sufficient even if the environment were to weaken further following a weak 2015 and 1H16. Based on Fitch's stress test, the banks' average "stressed" annual pre-provision profit (PPOP) of around 4.6% of average total loans remains above the average "stressed" credit cost of around 4.2%. This was notably higher than actual credit costs of 2.1% in 2015 and 2.6% in 1H16, compared with 1.14% in 2014. The outcome of Fitch's stress test is broadly captured in the banks' Viability Ratings (VRs), which reflect their varying vulnerabilities and resilience on a standalone basis through credit cycles.
Capital-impairment risk is therefore likely to be low for most major Indonesian banks in a stress environment. The large lenders could also rely on their high core capital buffers in the event of outsized asset-quality shocks; their average Tier 1 was 17.5% at end-June 2016, and the Tier 1 capital in this ratio is made up entirely of common equity. Many major foreign-owned banks tend to have lower core capital buffers than that, but Fitch believes they are likely to benefit from extraordinary support from their highly rated parent banks.
The foreign-currency loan portion had declined to 14.2% by end-June 2016 from above 30% at the time of the Asian financial crisis in 1997-1998. The decline is due to softer demand for foreign-currency loans caused by a major drop in the prices of Indonesia's major export commodities such as coal and palm oil, and a regulation introduced in June 2015 to increase the use of local currency in domestic transactions. However, non-bank private-sector external debt has increased gradually in the past five years to around 16% of GDP by end-June 2016, which could be a source of risk - particularly during heightened currency weakness and a further decline in commodity prices.
The weaker position of the mining and commodity sectors has contributed to deteriorating asset quality for the banking sector as a whole, with the system NPL ratio rising to 3.1% from a low of 1.8% at end-2013. Risks have also emerged from the supporting downstream industry related to mining and commodities. In response, the banks have taken measures to identify vulnerable borrowers, have stepped up monitoring, and explored restructuring solutions for viable businesses.