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Indonesian banks set to benefit from loan growth, ample liquidity – S&P Global

Indonesia's banks are set to gain from an expected uptick in lending growth and stronger liquidity positions built during the COVID-19 pandemic, according to S&P Global Ratings.

Loan growth in Indonesia will likely range between 8% and 10% in 2022, up from 5.2% in 2021 and 6.1% in 2019, Ratings analysts said during a Sept. 8 webinar. Profitability, measured by return on assets, will also improve in 2022 due to lower provisions for bad debt.

On the one hand, COVID-19 negatively affected the growth of Indonesian banks, but their capitalization and liquidity actually strengthened during the period, said Ivan Tan, the rating agency's director and lead analyst for South and Southeast Asia financial institutions.

Indonesian banks' core capital improved to 24.1% in 2021 from 22.2% in 2020 and 21.9% in 2019. The country's banks are also flush with liquidity, with Ratings estimating an aggregate loans-to-deposit ratio of 80% in 2022. The rating agency also forecasts that the banks' core capital will clock in at around 22% in 2022.

"We think that the liquidity that was built up in the last few years is going to be utilized for loan growth," Tan said.

Stronger economy

Indonesia's economy expanded 5.44% year over year in the June quarter, according to government data, outperforming several peers in the region. The International Monetary Fund predicts economic growth in the Asia-Pacific region to slow to 4.2% in 2022, from 6.5% in 2021. Based on government estimates, Indonesia's GDP is expected to grow 5.3% in 2022 and 5.2% in 2023.

Indonesian banks also boast some of the highest net interest margins in Asia-Pacific. The key indicator of profitability was 3.39% in the first half, according to S&P Global Market Intelligence data.

Still, some lingering risks remain. About 9.1% of the nation's loans are still classified as under moratorium or restructuring, an indication that COVID-19 is still a drag on the Indonesian banking system, said Tan.

The moratorium on loans in some sectors will likely be extended beyond the March 2023 deadline, according to local media reports. Sectors, such as tourism and food and beverages, are still struggling to recover from the negative effects of the pandemic, Ratings said.