Moody's changes outlook on Indonesian banking system from stable to positive

Moody's assessment of Indonesia's banking system is based on five factors.

The logo of credit rating agency Moody's Investor Services is seen outside an office Reuters

Moody's Investor Service, was in view that Indonesian banks will see improvement in its operating environment, asset quality, and capacity by the government to extend support whenever necessary, leading the rating agency to change its outlook on the Indonesian banking system from stable to positive.

In a report - Banking System Outlook for Indonesia - released on Tuesday, it was noted: "Improving Operating Environment Drives Positive Outlook, Moody's said Indonesian banks would benefit from improving the operating environment in the coming 12 to 18 months as the economic growth moves up due to supporting macroeconomics policies and a stronger market position for Indonesia's key commodities."

Quoting Moody's Vice President and Senior Credit Officer, Srikanth Vadlamani, said their baseline scenario assumes Indonesia's real GDP growth of 5.2% this year and 5.3% next year in comparison to the 5% growth last year.

Moody's assessment of Indonesia's banking system is based on five factors: improving the operating environment; improving and stabilizing asset quality and capital; stabilizing funding and liquidity (stable); improving profitability and efficiency, and improving and systemic support.

The operating environment for banks is leaning towards supporting macroeconomics policies and a stronger market for key commodities while asset quality would improve too, driven by the recovery in corporate revenues that should manage rises in loan delinquency. The trend is accompanied by dwindling debt levels, which should result in stronger debt servicing capacity.

Despite the faster loan growth, capitalization at Indonesian banks will continue to remain stable as their structurally high core profitability and loan loss coverage ratios provide the banks with strong buffers to withstand any asset quality deterioration which Moody's saying it has already peaked.

Indonesian banks also have a minimum reliance on the wholesale funding, coupled with their balance sheet which is liquid with government securities and other liquid assets comprising of 27% of banking system assets as of the end of March this year.

"All Moody's rated banks comfortably meet minimum Liquidity Coverage Ratio (LCR) requirements," the report said.

Moody's noted that the system support is improving the government's capacity to support banks is benefitting from the country's declining vulnerability to external shocks and lengthening track record of macroeconomics stability and fiscal discipline.