RI banks back on track 'but still in danger'

RI banks back on track 'but still in danger'

HONG KONG (Dow Jones): International credit rating agency
Fitch said in a report released Friday that it affirms its stable
credit rating outlook on Indonesian banks.

However, Fitch cautioned the banks still operate in a "low
growth and high risk environment."

Fitch noted Indonesia's 11 largest banks, which are state-
owned, hold 77 percent of the sector's assets, most of which are
government-injected recapitalization bonds.

Fitch said these bonds account for 65 percent of the banks'
balance sheet while loans represent only 17 percent. And of the
loans, some are nonperforming.

The rating agency added the high capital adequacy ratios
posted by some banks reflect "distorted balance sheets, with the
high proportion of government bonds that are zero risk weighted
for capital adequacy purposes."

Further, the low returns from the recapitalization bonds are
keeping profitability at low levels.

"Making new loans would allow the banks to increase interest-
earning assets but loan growth will be limited as credit demand
in Indonesia is largely confined to the relatively minor small to
medium sized business and consumer sectors," Fitch said.

But even if demand for loans were to pick up, Fitch noted that
banks will have a difficult time meeting such demand because the
banks won't be able to raise cash by selling the recapitalization
bonds which are currently trading below their book value.

"Also, Indonesia remains subject to an ongoing high level of
political and social instability" that could cause the rupiah to
weaken and put some upward pressure on interest rates "and once
again place the country's borrowers and their bankers in a very
difficult financial situation," Fitch said.