Can Indonesia's large state-owned banks weather challenges in 2015?

Profitability likely to stand strong.

Fitch Ratings expects Indonesia's three largest state-owned banks, PT Bank Mandiri (Persero) Tbk, PT Bank Rakyat Indonesia (Persero) Tbk and PT Bank Negara Indonesia (Persero) Tbk, to continue delivering healthy profitability in 2015.

According to a release from Fitch Ratings, the three banks' financial performance remained solid in 2014, with strong ROA - Mandiri had ROA of 2.7%, BRI of 3.6% and BNI of 2.7% at end-2014.

Fitch expects Mandiri, BRI and BNI to continue delivering healthy profitability in 2015, despite challenging operating conditions, such as rising inflation and high interest rates.

Their earnings are likely to be supported by a recovery in credit growth and manageable credit costs, as loan-quality deterioration is expected to be modest.

The earnings of Mandiri, BRI and BNI benefit from their positions as major local banks; they also show greater resilience than their peers through business cycles.

Here's more from Fitch Ratings:

Asset quality at Mandiri, BRI and BNI remained largely stable in 2014, and their NPL ratios remained below that of most of the 10 largest domestic banks and the Indonesian banking industry average.

Fitch expects their NPL ratios to increase slightly in 2015. Risks may stem from the adverse effects of a further weakening in commodity prices and/or exchange rate volatility.

Meanwhile, PT Bank Tabungan Negara (Persero) Tbk's (BTN; AA(idn)/Stable) profitability in 2014 came under pressure from higher funding and credit costs.

The state-owned banks' Fitch Core Capital and Tier 1 capital adequacy ratios remained robust - Mandiri at 17.4% and 14.8%, BRI at 19.7% and 17.1% and BNI at 19.4% and 15.8% respectively at end-2014.

The internal capital generation of Mandiri, BRI and BNI of between 17.8% and 24.8% are much stronger than most of their large domestic peers, thanks to their strong banking franchises.

The Issuer Default Ratings of Mandiri, BRI, BNI and BTN are support-driven, reflecting Fitch's view that the four state-owned banks are likely to receive state support in times of need, although the extent of support would vary somewhat.

Fitch expects the Viability Ratings on Mandiri, BRI and BNI to remain stable as these banks' are generally well-positioned against the more challenging domestic economic environment, supported by their sound loss-absorption cushion, resilient profitability and high core capitalisation.