Fitch Ratings says in a new report that most Indonesian banks should maintain their profitability in 2013, reflecting their sound loss-absorption capacity which balances risks from rapid growth. Their Rating Outlook is Stable.
"Major Indonesian banks should maintain their performance in 2013, supported by healthy domestic economic conditions. Steady earnings, adequate provisioning and high core capitalisation provide a sound buffer against a macroeconomic shock," says Julita Wikana, Director in Fitch's Financial Institutions group.
Fitch expects non-performing loans (NPLs) to increase in 2013 from their historical lows in 2012 as loans from the rapid credit growth during 2010-H112 of 25%-30% begin to season. This risk is indicated by Fitch's Macro Prudential Indicator (MPI) of '3', underlining rapid credit growth with potential high asset quality risks. Further, structural weaknesses commonly found in fast-growing emerging economies and global economic uncertainty could add to higher credit costs during difficult times.
Nevertheless, increase in banking stress should be comfortably covered by Indonesian banks' high interest margin and profitability as well as by pro-active provisioning.
Their net interest margin is among the highest in Asia, albeit likely to decline as competition from loans and deposits intensifies and as the banking industry matures.
Fitch expects major domestic banks to maintain high core capitalisation.
The pressure on capital is counterbalanced by higher profit retention, lower loan growth targets and, at some banks, equity injection. As a result Fitch believes the equity and capital buffers should remain sufficient to accommodate losses.