Profit of Indonesian banks feared to go crashing down

Amid narrowing banks’ net interest.

The profit of Indonesian banks will likely go down amid narrowing net interest margins.

According to a release from Moody’s, this is because small banks failed to pass on higher funding costs to borrowers, amid intense competition for deposits in the next 12 to 18 months.

The release noted that the high system average loan-to-deposit ratio is set at 90% on March 31, slightly lower than the regulatory limit of 92%.

The release also said banks' funding pressures will lead to greater credit differentiation between the larger and smaller banks.

Here's more from Moody’s:

We expect that the banks' funding pressures will lead to greater credit differentiation between the larger and smaller banks, because it will lower profitability more severely for the smaller banks, as they cannot fully pass on any extra funding costs onto borrowers.

Smaller banks that compete aggressively for deposits could therefore see their credit profiles come under pressure.

Nonetheless, any such credit differentiation will only occur gradually and over several quarters. So far, the contraction in the profitability of the banks has been moderate, and banks in Indonesia remain among the most profitable globally.

In addition, Indonesian banks are generally well capitalized and the economy remains robust; two factors that support sustainable loan growth, especially given Indonesia's low credit penetration.