T

he Indonesian banking system has solid buffers and is in a strong enough financial condition to counter contagion risks amid concerns about market volatility, according to Moody'€™s rating agency.

The agency'€™s latest report published recently revealed that 10 Indonesian banks rated by Moody'€™s and 20 others that were unrated by the agency had been shown to be sufficiently strong in the face of a contagion risk posed by weaker lenders.

The 10 Moody'€™s-rated Indonesian banks, which accounted for 65 percent of the country'€™s total banking assets as of September, possessed solid buffers in the form of substantial capital and profitability to withstand pressures on their asset quality.

'€œThe Indonesian banking system has strong buffers even outside of our rated universe. Most of the large banks that are not rated by Moody'€™s are owned by foreign parents, which are themselves highly rated,'€ Srikanth Vadlamani, vice president and senior credit officer at Moody'€™s, said.

The remaining smaller banks in the system, Vadlamani said, posed some risk, but most generally exhibited healthy financial metrics in terms of net non-performing loans (NPLs) and capital adequacy ratios (CARs).

The report showed that Indonesia'€™s small banks whose net non-performing loans (NPLs) exceeded 2 percent of loans and with CARs below 14 percent accounted for just 1.2 percent of system assets by the end of June.

Vadlamani said the agency predicted that the asset quality of Indonesian banks would come under pressure over the next 18 months due to a combination of slowing economic growth, weakening currency and lower commodity prices as well as a negative base effect.

However, Vadlamani said the current rating profiles of Indonesian banks were robust and could withstand a material deterioration in the country'€™s macroeconomic outlook due to their strong profitability as well as high levels of capital and loan-loss coverage.



In addition to that, Vadlamani said the Deposit Insurance Agency (LPS) had accumulated bank resolution reserves worth US$3.7 billion, which was equivalent to the combined deposits of the 31 smallest banks by assets by the end of last year and combined insured deposits of the 54 smallest banks by the same measure.

The report also revealed that banks were able to manage contagion risk from their customers'€™ high debts in foreign currencies despite the recent 10 percent depreciation of the rupiah.

Moody'€™s report showed that outstanding Indonesian private external debt more than doubled to $170 billion by the end of June, from $84 billion in the same period of 2010.

'€œBut the risks are lower than implied, as over 70 percent of this debt comprises debt owed to related parties, debt owed by state-owned enterprises, or debt in sectors with a natural hedge,'€ Vadlamani said.

Finance Minister Bambang Brodjonegoro said recently that the country'€™s currency and capital markets were under pressure, but lately had seen a '€œquite significant improvement'€, based on the latest assessment in October conducted by the Financial Sector Stability Coordination Forum (FKSSK), which comprises the Finance Ministry, Bank Indonesia, the Financial Services Authority (OJK) and the LPS.

'€œBanking supervisors in the OJK always monitor banks daily and directly hold discussions with bank managements regarding critical things. We also found that bank loan growth as of September had reached 11 percent, higher than 10.9 percent in the previous month, indicating an improvement,'€ OJK chairman
Muliaman D. Hadad said.