Indonesian banks outlook stable, says Moody's

Indonesian banks outlook stable, says Moody's

The Jakarta Post, Jakarta

The outlook for the debt and deposit ratings of Indonesian
banks is stable at an average B2 and B3, respectively,
international rating agency Moody's Investors Service said in its
annual report.

The average bank financial strength rating remains at E+,
reflecting the system's still weak financial fundamentals.

"Consolidation and divestment have significantly altered the
Indonesian banking landscape," says Beatrice Woo, a Moody's vice
president/senior analyst and the report's author.

"The number of players has been pared down by a third, but
excess capacity remains," she adds.

As the top four banks control 55% of system assets, the other
134 are unlikely to achieve economies of scale, the report says.

Moody's expects tightening regulatory requirements - which
will remove weak or marginal players - to drive the next round of
consolidation.

In the divestment process, an increasing proportion of system
assets have ended up with strategic foreign investors, the report
says, adding that Moody's anticipates bank managements will
introduce global best practices and operate on a more commercial
basis, prompting other domestic banks to follow.

Nonetheless, the government remains the largest shareholder in
the banking industry, controlling more than half of system
assets, the study says.

On balance, however, from a credit perspective, structural
developments have been positive, as Moody's expects the eventual
restoration of pricing discipline and market stability.

As with other regional banking systems, Indonesian banks have
reformed and restructured their operations, particularly in risk
management, corporate governance and transparency -- seen as key
reasons for crisis-related troubles.

However, Woo notes that "rapid progress has been impeded by
the magnitude of the crisis, as well as the difficult and
volatile nature of the operating environment, a condition which
persists, although improvements are apparent. "

As evidenced by several cases of substantial fraud in the past
year, the implementation of controls is proving elusive, given
the nature of Indonesia's high operating risk culture. Hence,
Indonesian banks continue to lag their regional peers in terms of
sophistication and standards, but Moody's expects greater foreign
participation to accelerate reform.

Financially, balance sheets have been largely repaired
although the true situation is less robust than the figures
suggest, the report says, adding that the impressive high capital
levels are mainly a function of the high proportion of zero risk-
weighted government recapitalization bonds.

"We think this situation overstates the economic capital
positions of the banks, particularly those with large balances of
restructured loans and those forecasting strong loans growth.
While these government securities provide a stable and passive
source of earnings, they could expose the banks to a greater
level of interest rate risk due to the relatively high proportion
of fixed-rate instruments," Woo says.

The report adds that problem assets have been cleared through
substantial transfers to the Indonesian Bank Restructuring
Agency, but those restructured loans which stay on bank books
will be vulnerable to any economic downturn.

Finally, the report says Indonesian banks should sustain their
near-term profitability, in the absence of sizable loan loss
provisions. The degree or portion of earnings generated from core
operating performances is likely to vary among banks.