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Jakarta Post

Market pressures to halt positive Indonesian bank trends: Fitch Ratings

  • News Desk

    The Jakarta Post

Jakarta   /   Wed, September 26, 2018   /   04:57 pm
Market pressures to halt positive Indonesian bank trends: Fitch Ratings High-rise buildings are seen in the central business district on Jl. Sudirman, Central Jakarta. (JP/VPS)

Credit rating agency Fitch Ratings says currency depreciation and higher domestic interest rates are likely to halt the recent improvement in Indonesian banks' asset quality and put downward pressure on profitability.

However, their margins are likely to remain strong which, together with high core capital ratios, will act as a buffer against the impact of market turbulence, the agency says in its report seen by The Jakarta Post on Wednesday.

The report also says banks' foreign currency assets and liabilities are generally well-matched, or hedged, which limits risks from currency weakness.

“Further declines in the rupiah could, however, create debt-servicing pressures for borrowers with substantial foreign currency debt and weaker hedging practices, posing asset-quality risks to banks,” it added.

System-wide foreign currency lending accounted for around 15 percent of total loans at the end of first half of this year, which was down 17 percent in 2014 and more than 30 percent in the 1990s, but is still high compared to regional emerging market peers.

The pressure on the rupiah has drawn a strong response from Bank Indonesia (BI), which has hiked its policy rate by a cumulative 125 basis points (bps) since May this year and intervened aggressively in the foreign exchange market. Fitch expects BI to raise its policy rate by a further 25 bps in the second half of this year and 50 bps next year.

It believes that higher interest rates will put upward pressure on banks' funding costs, and may weigh on gross domestic products (GDP) growth and asset quality. (bbn)