S&P: Economic Risks Still High for Indonesian Banks Next Year
Jakarta. Indonesia's banking industry is likely to face lingering headwinds from the nation's sluggish growth and weak commodity prices next year, possibly undermining their profitability, according to memo by rating agency Standard & Poor's.
"Economic risks faced by banks in Indonesia remain relatively high due to the country's low per capita income and the constraint on economic development that infrastructure shortfalls, legal uncertainties and corruption pose," S&P said in a memo received by the Jakarta Globe on Tuesday.
S&P forecast Indonesia to grow 5 percent next year, which is slightly lower than the government's target of 5.3 percent.
Such risks will probably hold back lending growth at a modest rate, while also making the industry vulnerable to higher credit losses, the New York-based rating agency said. Still, S&P noted that the economic risks remains stable as the government is expected to maintain its "orthodox approach to fiscal and economic policy."
The central bank forecast lending in Indonesia to grow between 12 percent and 14 percent next year — a considerable increase from an estimate of 9 percent to 10 percent by the end of this year.
Total lending growth in Indonesia, home to some 120 commercial banks, slowed to Rp 3,881 trillion ($282 billion) as of August this year, a modest 11 percent increase from the same period last year, against the backdrop of a 4.67 percent annualized rate national economic growth as of September.
At the same time, the portion of bad loans rose to 2.7 percent in August from 2.3 percent last year, data from Bank Indonesia reported.
Still, S&P noted that industry risks for the sector remains positive, thanks to improving institutional framework since the country's banking crisis in the late 1990's.
Risk appetite in the banking system is also seen as moderate with manageable asset growth and commercial practices, especially since customer deposit — typically seen as a stable funding source — still dominates banks' funding profiles, according to S&P.
"We consider banking regulations in Indonesia as lagging international standards, although they have improved markedly," the rating agency said.
"We believe a track record of effective, proactive and timely regulatory action to prevent build-up of systemic risks, following a transition of regulatory responsibility to the Financial Services Authority from Bank Indonesia in 2013, would signal a strengthened regulatory framework, which would contribute to lowering the banking industry risk."
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