Indonesia banks entering challenging phase: S&P

The Jakarta Post, Jakarta

Indonesian banks are entering a new phase of transformation, which will pose greater challenges for industry participants, according to international rating agency Standard & Poor's (S&P)

In the medium term, the Indonesian banking sector is poised to enter a phase of increasing risk with added pressure on its earning margins, S&P said in its commentary titled "Changing Dynamics Pose Greater Challenges for Indonesian Banking Industry" published on Thursday.

Nevertheless, it said, the industry's success in managing these emerging risks will depend on the extent of restructuring undertaken by the banks themselves, together with the banking reforms that the central bank, Bank Indonesia, has introduced so far.

However, two positive structural developments are expected to mitigate the challenges brought about by the changing industry dynamics: growing foreign investment in domestic commercial banks, bringing in best practices; and implementation of measures/initiatives by authorities, such as risk management programs.

"The challenges to the industry fall broadly into two types--pressure on margins and asset quality risks," said S&P credit analyst Adrian Chee of the Financial Services Ratings Group.

Pressure on margins is expected to come with the decline in benchmark interest rates and rising competition. Asset quality issues are expected as banks increase lending, with lower reliance on government-related securities, the rating firm said.