Despite Indonesia's macroeconomic conditions and liquidity experiencing a correction, Fitch Ratings believes that Indonesia's major banks are able to withstand a reasonably high degree of asset-quality stress, mainly due to the banks' strong standalone loss absorption cushions and likely support from highly rated foreign parent companies. Because of the banks' sound earnings buffers, they are expected to cope with the higher non-performing loans (NPLs) which are expected to emerge in the next one or two years ahead.
The report of Fitch Ratings says: "Under a stress test conducted by Fitch, the NPL ratio of Indonesia's nine major lenders could hypothetically rise to around 18 percent over the next three years from 2 percent at end-June 2013. Their annual loan losses therefore, on average, could be equivalent to around 4 percent of loans. In comparison, loan losses were only between 1.0 percent and 1.5 percent of loans over 2011-1H13, when operating conditions were fairly benign. Although the stress conditions would likely lower the banks' pre-provision profits to around 4.8 percent of loans from the current 6.0 percent level, that is still enough to cover the loan losses under the stress scenario. The risk of capital impairment is therefore likely to be low for most major Indonesian banks in a stress environment. In the event of outsized asset-quality shocks, many of the large lenders can also rely on their high core capital buffers. The average Tier 1 capital adequacy ratio (CAR) of the nine major Indonesian banks was 14.6 percent at end-1H13, slightly higher than 13.9 percent at end-2012. The Tier 1 capital in this ratio is made up entirely of common equity."
The major banks of Indonesia are assessed to be able to offset losses with earnings alone. These major banks include Bank Mandiri, Bank Central Asia, Bank Rakyat Indonesia and Bank Negara Indonesia. The medium-sized banks can rely on support from their higher-rated parents in case of "stressed" losses. These medium-sized banks include Bank CIMB Niaga, Bank Internasional Indonesia and OCBC NISP.
The full report, which is titled "Indonesian Banks' Stress Test: Sufficiently Buffered Against Potential Losses", can be accessed here.
Fitch Rated Indonesian Banks:
|Bank||Long Term IDR
|Bank Rakyat Indonesia||BBB-||bb+|
|Bank Central Asia||BBB-||bbb-|
|Bank Negara Indonesia||BBB-||bb|
|Bank CIMB Niaga||BBB||bb|
|Bank Internasional Indonesia||BBB||bb|
|Bank Pan Indonesia||BB||bb|
|Bank OCBC NISP||BBB||bb|
Source: Fitch Ratings