Moody’s says Indonesia banking system outlook negative

Singapore, August 11, 2009 -- Moody's Investors Service says that the
outlook for the Indonesian banking system is negative over the next 12-18
months, reflecting Moody's assumptions for fundamental credit conditions
over this timeframe.

"Over the next 12 months, Indonesian banks will face increasing pressures
-- particularly on asset quality -- but will fare relatively well as the
country's macro-economic conditions slow, although not to the extent seen
on a global basis," says Beatrice Woo, a Moody's Vice President and
Senior Credit Officer. "Our outlook for the Indonesia banking system also
assumes that prevailing external macro-economic conditions are not
protracted. " 

Woo was speaking on the release of Moody's latest outlook -- which she
authored -- on the Indonesian banking system. The report -- which is
wide-ranging in its content -- looks at positive and negative rating
trends as well as key drivers, such as franchises, risk positioning, the
regulatory environment, and financial fundamentals.

Moody's rates a total of 10 Indonesian banks with their foreign currency
deposit ratings all at B1, their global local currency (GLC) deposit
ratings ranging from Baa2 to Baa3, and their bank financial strength
ratings (BFSR) from D- to D+.

"In the current environment, the results of rapid loan growth, averaging
20% annually over the past five years, could be a potential source of
higher credit costs, and as newly underwritten loans test the upgraded
risk management systems of the banks," says Woo.

"In some cases, banks had embarked on consumer as well as
small-and-medium- enterprise lending, new areas for them, and therefore
not without risk," says Woo. "Furthermore, their restructured loans are
vulnerable to a downturn and could become a particular problem for the
state-owned banks. In this context, the system's non-performing loans
ratio inched up to 4.06% in April 2009 from 3.20% at end-2008." 

"And while liquidity is less of a threat, pricing has increased, causing
net interest margins to contract; intense competition for deposits ---
the level of which has abated since late-2008 --- has boosted the cost of
funds," says Woo.

"On the other hand, bank managements have successfully navigated through
several difficult economic periods post-1997 crisis, and they are
expected to respond well and with experience to the current environment,"
says Woo.

Looking ahead, consolidation and divestment continue to pare the number
of players, but excess capacity remains. As the top 10 banks control
nearly two thirds of system deposits, the other 113 are unlikely to
achieve economies of scale. As a result, tightening regulatory
requirements will further drive consolidation. 

The new Moody's report further points out the government remains the
industry's largest shareholder, albeit much reduced, controlling 25% of
system assets. Overall, from a credit perspective, structural
developments have been positive, and pricing discipline and market
stability should eventually return.

Despite the negative industry outlook, creditworthiness -- that is
manageable asset quality, modest economic capital solvency, overall
profitability and reform -- will be broadly sustained. Generally,
Indonesian banks are better equipped now to absorb stress, while their
managements have responded quickly to adverse circumstances. 

Hence, the BFSR for the 10 Moody's-rated Indonesian banks carry stable
outlooks. Their resulting fundamentals, especially capital levels, are
expected to be adequate enough for them to remain in their rating ranges.
Their weighted average BFSR remains at D. For comparative purposes, the
weighted average Indonesian BFSR during the 1997 financial crisis was E
against a pre-crisis D. 

As for their credit ratings, the Indonesian banks' GLC deposit ratings
are on review for possible downgrade, in line with Moody's initiative to
review governments' abilities to provide support to their banking
systems, as detailed in the May 2009 report, "Financial Crisis More
Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa
Countries."

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