Economic risks of Indonesian banks decline as per capita income rises

Robust profitability and high capital retention keeps the sector well-capitalised.

Economic risks faced by Indonesian banks have lessened due to per capita income growth and strong economic prospects, according to an S&P Global Ratings report.

Although the Indonesian economy is still considered lower-middle income, its banking system is well-capitalised due to robust profitability and high profit retention, said S&P. On the other hand, high credit costs and private sector external debt still put pressure on credit risks.

“The government has struck a fine line balance between prudential supervision to ensure the safety and soundness of the banking system, while exercising flexibility to support the economy where needed,” the report stated.

However, Indonesian banks remain vulnerable to moral suasion by the government for loan exposure to micro, small and midsize enterprises to be at least 20% of their loan books to promote financial inclusion.

Core customer deposits will continue to fund the banking sector’s loan book, therefore stabilising the banks’ funding profiles, the report added

S&P has classified the banking sector in group ‘6’ under the Banking Industry Country Risk Assessment (BICRA), along with Brunei, Uruguay, Portugal, Hungary, Thailand, China, Colombia, Oman, Trinidad and Tobago, and Brazil. Countries with the lowest risk has the lowest number (‘1’), whilst the riskiest markets is in group ‘10’.

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