S&P: Indonesia's Banking Industry Stable but Profitability May Weaken

Standard & Poor's (S&P) said several risks - including low per capita income, low commodity prices, weak infrastructure, legal uncertainties and corruption - will most likely curtail lending growth and make the domestic banking industry more vulnerable to higher credit losses.

However, the US financial services firm also noted that the banking industry will most likely remain stable as Indonesia's financial authorities have been keen on safeguarding financial stability amid global uncertainty (instead of seeking accelerating economic growth). For example, despite inflation and the current account deficit under control, Bank Indonesia remains committed to its relatively high interest rate regime (with the key interest rate still at 7.50 percent). S&P also notes that customer deposits (a stable funding source) continue to dominate commercial banks' funding profiles (there are some 120 commercial banks active in Indonesia).

However, S&P also stated that - although having improved markedly since the Asian Financial Crisis in the late 1990s - Indonesia's banking regulations still lag behind international standards.

Sluggish economic growth, the high level of global financial uncertainty (due to the US interest rate hike and China's economic slowdown) and Bank Indonesia's high interest rate regime all led to weak lending growth in Indonesia in 2015. Credit growth this year is estimated to expand between 9 and 10 percent (y/y). Indonesia's central bank projects a 12-14 percent credit growth level next year, while it sees Indonesia's GDP growth in the range of 5.2-5.6 percent in 2016.

Recent Bank Indonesia data also show that bad loans rose to 2.7 percent in August 2015 from 2.3 percent in 2014.

Meanwhile, Singapore-based DBS Bank said Indonesia's inflation is expected to accelerate modestly to 4.5 percent (y/y) in the first quarter of 2016, a level that is still within the 2016 target range of Bank Indonesia (between 3-5 percent y/y). Therefore the DBS Bank sees a possibility for Bank Indonesia to cut its BI rate. However, the firm also emphasizes that Bank Indonesia is probably more focused on rupiah stability than on inflation when determining its monetary policy.

The rupiah has appreciated markedly after the US Federal Reserve decided - in line with markets' expectations - to raise its Fed Fund Rate by 0.25 percent at its December policy meeting. However, various financial institutions warn that the rupiah could depreciate again in 2016 if the US Federal Reserve continues to raise its benchmark rate.

Meanwhile, Switzerland-based Credit Suisse expects Indonesia's central bank to cut its BI rate by 75 basis points, gradually, over the 12 months in 2016.

Inflation in Indonesia:

Month	Monthly Growth           2013	Monthly Growth           2014	Monthly Growth           2015
January	1.03%	1.07%	-0.24%
February	0.75%	0.26%	-0.36%
March	0.63%	0.08%	0.17%
April	-0.10%	-0.02%	0.36%
May	-0.03%	0.16%	0.50%
June	1.03%	0.43%	0.54%
July	3.29%	0.93%	0.93%
August	1.12%	0.47%	0.39%
September	-0.35%	0.27%	-0.05%
October	0.09%	0.47%	-0.08%
November	0.12%	1.50%	0.21%
December	0.55%	2.46%
Total	8.38%	8.36%	2.37%

^{Source: Statistics Indonesia (BPS)}

Inflation in Indonesia and Central Bank Target 2008-2015:

	2008	2009	2010	2011	2012	2013	2014	2015
Inflation (annual percent change)	9.8	4.8	5.1	5.4	4.3	8.4	8.4	2.9¹
Bank Indonesia Target (annual percent change)	5.0	4.5	5.0	5.0	4.5	4.5	4.5	4.0

^{¹ projection Bank Indonesia
Sources: World Bank and Bank Indonesia}

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