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.