Can Indonesian banks survive US tightening amidst persistent rupiah weakness?

The Indonesian rupiah has plunged to a three-year low.

Unlike a number of its regional peers, Indonesian banks are ‘moderately vulnerable’ to liquidity risks brought about by tightening US monetary policy especially as the rupiah continues to weaken against the greenback after plunging to a three year low last May, according to credit rating agency Fitch.

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“Rupiah weakness could pose risks to banks' asset quality by pushing up the cost of foreign-currency debt servicing,” Fitch noted, adding that the pressure on medium-tier and second-tier banks are likely to be higher compared to the four major banks who enjoy wider margins and stronger core capitalisation.

Foreign currency loan exposure also remains a key vulnerability for Indonesian banks as they account for a higher proportion of lending than their ASEAN peers. However, the foreign exposure has declined steadily over time from more than 30% in the late 1990s to 15% by 2017.

The forex loan composition of Bank Rakyat Indonesia is at 10% whilst Bank Central Asia is at 7%. Both Bank Mandiri and Bank Negara Indonesia are at a slightly higher but generally safe 15%.

Although previous stress tests have shown that a rupiah depreciation above Rp17,000/US$ level could level considerable strain on the country’s banking system, banks remain sufficiently shielded against a larger park of the risk, UOB Kay Hian noted in an earlier report. 

A stress test by Fitch also reveals that banks are sufficiently capitalised to weather through the brunt of the credit crunch as annual pre-provision operating profit of the nine largest banks clocked in at 5.3% of total loans which is higher than the average stressed credit cost of 3.7%, indicating earnings can cope with higher credit costs.

“Profitability and capitalisation of the large banks are strong enough to provide a cushion against the potential negative effects [of US tightening].”