6 June 2007
Fitch Ratings-Jakarta/Singapore-05 June 2007: Fitch Ratings has today commented in an upcoming Special Report that the financial performance of Indonesia's banks is generally expected to improve this year against a backdrop of benign interest rate conditions and stronger GDP growth in the country. This supports the Positive Outlook on the international ratings of the ten larger banks covered by Fitch, which are rated 'BB-' (BB minus). The underlying profitability of the banks in 2006 remained quite good despite the more difficult operating climate in the first half of the year. The banks registered an average ROA of 1.7% and net interest margin of 6.0% in 2006, which is still among the strongest in Asia.
However, asset quality issues remained as the NPL ratio doubled to 10.8% at end-H106 before declining to 7.5% at the end of the year. The bulk of the problems lay with the legacy loans at Bank Mandiri and Bank Negara Indonesia, two systemically important banks which accounted for close to 30% of banking system assets. Nevertheless, these problem loans are gradually being tackled, with the sharp decline in domestic interest rates since H206 expected to aid in overall debt servicing ability. There was much milder deterioration in loan quality at several of the now foreign-owned private national banks, thanks to the improved risk management standards introduced by their financially stronger and reputable foreign parents. While these state-owned banks still have a lot of catching up to do, the challenge for the other private banks is in maintaining the discipline needed to continually enhance risk controls and processes to cope with a growing base of loan assets, including the generally still unseasoned portfolio of retail loans.
Higher minimum capital requirements by 2010 (of IDR100bn) have sparked a flurry of bank sales of several small Indonesian banks to interested foreign bankers. This should help ease the supervisory burden of the regulators and is generally viewed as positive for the development of the industry as a whole, since the small players are being absorbed by larger and stronger banks or foreign financial institutions. Under the Indonesian Banking Architecture (API), the regulators aim to reduce the number of banks to 50-60 players from a current base of 130 commercial banks. While Fitch recognises the benefits of consolidation in the creation of a more robust banking system with fewer but larger players, the agency is also mindful of the potential negative effects of "forced" rationalisation, which can be detrimental to the value of the banks and disruptive to the banking system. It may be appropriate to adopt a more flexible approach when making such strategic decisions to enable market forces to work.
Contacts: Tan Lai Peng, Singapore, +65 6336 6801; Ambreesh Srivastava, Singapore, +65 6336 5704; Yanto Umar, Jakarta, + 6221 529 02461.
Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6336 0095.
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