Jakarta. Indonesia's robust macroeconomic environment will help commercial lenders stabilize asset quality and widen loss-absorbing buffers, rating agency Moody's Investors Service said on Wednesday (08/08).

In its Banking System Outlook report for Indonesia published on Tuesday, Moody's said it has changed its outlook on the Indonesian banking system to "stable" from "positive." The outlook indicates where the agency's rating is heading. If it is "stable," it is unlikely to change, if "positive," there is a high likelihood of it being risen.

The announcement came after Moody's upgrade of Indonesia's sovereign ratings by one notch to Baa2 from Baa3 with a stable outlook in April 2018. The rating agency also upgraded the baseline credit assessment for seven of the nine rated banks, which account for 66 percent of total assets, in April-June.

"The stable outlook reflects our assessment that over the next 12-18 months, banks in Indonesia will show stabilizing asset quality in a robust macroeconomic environment," Simon Chen, vice president and senior analyst at Moody's, said in a statement on Wednesday (08/08).

"During this period, the banks will also demonstrate large loss absorbing buffers, underpinned by their strong profitability," said Chen, who authored the report.

Moody's stable outlook for Indonesia's banking system is based on its assessment of six drivers: operating environment; asset risk; capital; funding and liquidity; profitability and efficiency; and government support.

According to the rating agency's assessment, the Indonesian banking sector will see an improvement in asset quality driven by a recovery in corporate revenues.

Both funding and liquidity will be stable in the banking system and pressure from faster loan growth will be modest as bank deposits will be growing at a similar pace.

Moody's noted that the capital adequacy ratio in the banking system exceeded 20 percent in May, going far above the regulatory requirement of 8 percent and those of other Asian systems.

"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 said in another statement released to explain the report.

Meanwhile, the expected economic expansion is also likely to help accelerate loan growth to between 10 percent and 12 percent annually, compared with 8.2 percent last year. Moody's predicts Indonesia's gross domestic product will expand by 5.2 percent this year and next year, compared with 5.1 percent in 2017.

Indonesia's domestic demand, the credit assessor said, is likely to improve ahead of the 2019 presidential election and increase export revenue. The country's supportive monetary and fiscal policies amid global economic pressures are also expected to help the overall economic situation.

Moody's also predicts that new nonperforming loans and restructured loans will likely stay "far" below their 2016 peaks after sharp declines in 2017.

"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," the agency said.

Moody's said the profitability of Indonesian banks is likely to remain strong, benefiting from wide net interest margins of around 5 percent — way above others in the region.