Indonesia's banks are expected to raise profits in the 2018 fiscal year on the back of lower provisioning, declining credit costs and recovering asset quality, S&P Global Ratings said in a March 12 report.
The Southeast Asian country's banking system is on a "path to recovery" following an economic and financial credit slump that began in 2013 and bottomed out in 2017. This is expected to be fueled by stronger commodity prices and the government's macro-infrastructure plans that could have a "significant multiplier effect on the economy." The country's GDP could grow by 5.4% in 2018 and 5.6% in 2019, from 5.1% in 2017, S&P noted.
Consequently, bank earnings are forecast to rise in 2018 as lenders reap the benefits of lower credit costs, with most of the provisioning already set aside in 2016. They have also become more cautious following the downturn, the rating agency added, as a result of which special mention loans and loan restructuring activity is forecast to slow down. The rating agency expects credit costs in 2018 to average 150 basis points, as a percentage of loans, for its rated banks, compared to the 2016 peak of 225 basis points.
The Indonesian banking system dwarfed other Southeast Asia banking systems in terms of profitability, S&P said. Indonesian banks posted on average a 2.45% return on assets ratio for 2017, which was double the 1.08% ratio for Malaysian banks, 1.05% for Thai banks, 1.17% for Philippine banks and 0.91% for Singapore banks.
The country's four largest banks by assets — PT Bank Mandiri (Persero) Tbk, PT Bank Central Asia Tbk, PT Bank Rakyat Indonesia (Persero) Tbk and PT Bank Negara Indonesia (Persero) Tbk — reported year-over-year increases in their full-year net income for 2017. Bank Mandiri's net profit for the quarter ended Dec. 31, 2017, rose to 5.570 trillion rupiah as provisions more than halved. Bank Central Asia also attributed its 13.1% year-over-year increase in net profit for 2017 to a decline in provisions.
However, S&P also warned of risks such as "the commodity drag." While the Indonesian banking industry's nonperforming loans ratio dipped to an average of 2.6% in December 2017, from a peak of 3.2% in February the same year, the ratio for the mining sector remained high at 6.2% as of Dec. 31, 2017.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.
As of March 16, US$1 was equivalent to 13,755 Indonesian rupiah.
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