Beatrice Woo, Moody’s vice president and senior credit officer, spoke with The Jakarta Post’s Esther Samboh about Indonesian banks’ sustained improvements since the 1997 Asian financial crisis, which may have helped them avert the effects of the eurozone debt crisis. However, there are risks that may weigh on their performance, including a “worrying trend” of surging foreign currency loans. Here are excerpts of the interview:

Question: How do you view Indonesia’s banking industry in light of the ratings upgrade for many of our top banks?

Answer: Indonesian banks’ ratings have been moving up while global banks have been moving down. So, Indonesia is catching up. It’s higher than the rated average now.

Indonesian bank ratings have moved up for two reasons. First, is because the sovereign rating moved up. And the banks are always aligned with the government. So, the higher the government’s rating is, the more the ability the government has to support the banks.

The other reason why banks’ ratings have also gone up is really because the banks have improved. They’re so much stronger now. Over the last 10 years they have strengthened themselves. With regards to asset quality, for example, the system’s NPL ratio is at 3 percent. By Indonesian standards, this is very, very low.

Then, they’ve got strong capital. Where we see pressure on capital is because of growth. Because they’ve been growing so strong, so they keep needing more and more capital.

And third, the earnings outlook has been very strong as well. Indonesian banks have seen three straight years of record profits. So, this is always positive because it helped them build up their capital base.

So, the overall outlook is very strong, and bank ratings have gone up because of that. We recognize the improvements, and because of that, we also upgrade them, for those two reasons — one is because of the country’s ratings, and the other is because they have gotten much stronger.

Most of the banks have stable outlooks. What are the chances for that to be changed to positive to ease them in being further upgraded?

I think that some of the banks’ ratings could face upward pressure if they continue their performance. Outlooks always indicate the direction ratings are going to go. So actually, if you look at Bank Danamon and Bank Permata, we’ve got positive outlooks on them. So, that suggests that if they continue, if things don’t go badly, their ratings could be upgraded. So, there could be more ratings upgrades.

But in terms of other ratings like deposit ratings, that will have to depend on the sovereign rating generally.

In the past two years, we’ve taken positive actions on four out of nine banks that we rated in Indonesia. And we’re not equity analysts. We don’t keep changing our ratings, we try to rate through the cycle. The banks have to show a structural improvement and sustain their performance before we change the ratings. Their financial performance is correctly captured by their ratings.

What are the risks to these good ratings?

The first one is loan growth, because loan growth has been rapid recently, coming on the back of many years of very strong growth. So we’re going to watch that. We just want to make sure that the quality of growth is good, that there are not going to be problems in the near future.

We are also watching foreign currency loans, which have been growing very strongly. That trend is across Asia, not just Indonesian banks. Many of the other banks in the region have seen foreign currency loan growth. But, still, I think we are worried. We remember 1997 and what happened then. So, that’s something that we’re watching also. It’s a worrying trend, and I think there’s funding also that is coming from short-term foreign currency loans. So, we need to watch that.

The third risk to watch is liquidity. Liquidity is tighter especially in foreign currency. For Indonesian rupiah the LDR [loan-to-deposit ratio] is at 85 percent. It’s still not that bad, but compared with where it was before, just three years ago, it was at 60 percent. So it’s something that we need to be aware of. Previously, liquidity was no problem for Indonesian banks.

And then the last thing to watch is competition. A lot of banks are competing on price now. We have to watch that. For example in the housing loans business.

I only mentioned four risks but if that blows up, the amount could be material, and those risks could be significant. So, it’s pretty balanced. That’s why we have stable outlook. It’s coming on the back of 10 years of good growth. Indonesia has had a really good run.

You did not mention the impact of Indonesian banks’ exposure to European banks as a risk. How are Indonesian banks positioned on that?

We did a review on which banking system will be very much affected by the eurozone situation. Indonesia came in at the bottom of the list in the sense that it is probably among some of the least affected, in terms of the exposure, and in terms of the funding that they get from European banks.

So, relatively speaking, they are better positioned than some other banking systems in Asia, so they will be less affected.

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