Indonesian Banks Have Ample Buffers to Protect Loss From Rising Restructured Loans: Moody's
Jakarta. Indonesian banks have ample buffers to protect them from potential losses amid growing restructured loans over the past year, according to a report by Moody's Investor Service on Thursday (24/08).
The ratio of restructured loans to gross loans at nine rated commercial banks in the country rose to 4.6 percent at the end of 2016 from 3.3 percent at the end of 2015.
The report noted that the ratio had come down to 4.3 percent at end-March this year, though that figure is still more than double the ratio recorded at the end of 2014.
The rated commercial banks included in the report are Bank Permata, state-controlled Bank Negara Indonesia, Bank CIMB Niaga, the biggest bank by asset, Bank Mandiri, Bank Tabungan Negara, Bank Rakyat Indonesia, Pan Indonesia Bank, Bank Danamon Indonesia and the country's biggest bank by market capitalization, Bank Central Asia.
Alka Anbarasu, Moody's vice president and senior analyst, said in a statement that the ongoing increase in restructured loans "underscore[s] the high latent asset risks."
"Data from some banks in Thailand and Indonesia show that about 20-25 percent of their restructured loans have become non-performing in the past two to three years," the report said.
Besides Indonesian banks, the report also surveyed banks in Thailand. Commercial banks in both countries are similar in terms of having notably high ratios of restructured loans and sufficient buffers against potential losses.
However, the report pointed out that Thailand and Indonesia are in different stages of their respective credit cycles. As a favorable economic condition helps banks in Indonesia, many small and medium-sized enterprises in Thailand are still struggling and Moody's predicts a rapid build-up of loans will continue.
"Indonesia's resource-rich economy is now on more solid footing, aided by commodities recovery, so growth in restructured loans will moderate and their [non-performing loan] slippage rates will gradually decrease," the report said.
Banks in Indonesia have "ample loan loss reserve and capital cushions" on the back of solid profitability, the report added.
The ratio of loan loss reserves to problem loans at rated banks exceeded 120 percent as of the end of 2016.
Moody's presented two scenarios: either the ratio will decline to 110 percent if 25 percent of restructured loans become non-performing loans and increase their NPL ratio by 1.1 percentage points, or that ratio will drop to 76 percent if 50 percent of restructured loans are impaired and increase their NPL ratio by 2.3 percentage points.
For example, Bank Mandiri's loan loss coverage ratio will decline to 78 percent from 124 percent as of the end of 2016 under the second scenario. Under the same most severe scenario, Bank Permata — which has the highest NPL ratio among other rated banks in Indonesia — will grow to 13 percent but its coverage would still above 80 percent.
Moody's also improved its outlook on Indonesia's banking system to positive from stable earlier in June on the back of an expected improved operating environment for banks, asset quality and the government's capacity to extend support.
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