What you need to know about Indonesian banks

Fitch expects lower but still healthy loan growth in 2012 - but how healthy is it?

In a release, Fitch Ratings says that the rating Outlook on Indonesian banks is Stable, and is a reflection of the resilient banking industry and sovereign's sound economic prospects.

"Indonesian banks should remain resilient to challenging conditions in the global economy. Steady earnings, adequate provisioning and sound capital provide a reasonable buffer against these challenges," says Julita Wikana, Director in Fitch's Financial Institutions group. Barring any severe knock-on effects from a still uncertain outlook on the global economy, Fitch expects the banks to continue delivering sound profitability in 2012 as lower funding costs and manageable credit costs offset competitive pressure. The agency expects lower, but still healthy loan growth, of 15%.

Fitch recently upgraded the Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (LTFC & LC IDRs) of eight Indonesian banks (for more information please see the rating action commentary, entitled "Fitch Upgrades 8 Indonesian Banks' IDRs on Sovereign Upgrade", dated 19 December 2011) following the change in Indonesia's sovereign Outlook.

Fitch expects net interest margin - among the highest in South Asia - to remain strong but under pressure, as the scope to reduce funding costs is limited. In addition, rising competition for market share may dampen NIM, to some extent.

Asset quality and credit costs are likely to remain manageable in 2012 amid still-favourable domestic economic conditions. However, any further improvement is likely to be moderate, as some risks may arise from the build-up of loans up to 90 days in arrears, together with a generally rapid pace of loan growth.

The pressure on capital is counterbalanced by greater earnings retention, lower loan growth and capital injection. As such, Fitch expects the equity-capital buffers to remain reasonable in light of healthy earnings, which act as a first line of defence against losses, and in view of the favourable local economy.