Indonesian banks in 2017 will continue to see a rise in nonperforming loans, in particular related the commodities and medium-sized sectors, as economic fundamentals are unlikely to improve for the country amid a slowdown in the global commodities market, according to S&P Global Ratings.
The slump in the global commodities market beginning around 2013 hit Indonesian lenders' asset quality, as the segment makes up about 10% of the banking sector's total exposures, S&P Global Ratings analyst Ivan Tan said during a March 29 webcast.
The problem loan ratio for the Indonesian banking sector rose to 3.05% in 2016 from 1.83% in 2013, according to data by SNL Financial, an offering of S&P Global Market Intelligence.
Indonesia's GDP growth slowed to 5.02% in 2016 from 5.55% in 2013 amid the commodities slump, and it is difficult to expect an uptick in 2017, Tan said, adding that S&P Global Ratings' view is for 2017 GDP growth to range between 5% and 5.2%, while the government holds a 7% target.
Weak loans — comprising NPLs, special mention loans and performing restructured loans — made up 11% of total loans at Indonesian banks in 2016; this ratio is at the higher end among Asian economies, Tan said. Indonesian banks' credit costs have been rising since 2013, as well as their provisioning costs.
"Under the economic slowdown, higher indebtedness and weaker profitability are pushing marginal borrowers to delinquency," Tan said.
Looking ahead, the level of weak loans is unlikely to have already peaked, and could rise to 13% of total loans in 2017, assuming that economic conditions in the Southeast Asian country are unlikely to improve this year, he said.
Loan growth will continue to be slow, at between 8% and 10% in 2017, compared to before the oil price decline, when the banking sector saw growth of above 20%, Tan said. Coupled with higher provisioning costs, slower loan growth will continue to weigh on the banking system's top line.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.