Indonesian banks' loan-to-deposit ratio to surpass the 15-year high of 84%

Moody's expects 2013 to be a good year.

Moody's Investors Service says that the outlook on the Indonesian banking system for the next 12-18 months remains stable, based on a conducive operating environment that is expected to support asset quality and profits.

Here's more from Moody's:

"We expect 6% GDP growth, 20% loan growth and low credit costs in 2013. These trends will protect the Indonesia banks' strong capital generation capacity" says Wee Siang Ng, a Moody's Vice President and Senior Analyst.

"However, with the Indonesian banking system's non-performing loan ratio at 2%, further improvements will be hard to come by, and there are downside risks that we remain mindful of, more particularly the risk of asset quality deterioration posed by several consecutive years of rapid credit growth and by political uncertainty" concludes the Moody's analyst.

Ng was speaking on the release of Moody's "Banking System Outlook: Indonesia," and which he co-authored.

The outlook examines key factors for the banking system, including the operating environment, asset quality, funding and liquidity, profitability, and systemic support.

"With the operating environment, our assessment is stable as we expect monetary policy to stay accommodative, the persistence of a relatively low and steady inflationary environment, and Bank Indonesia's continued emphasis on growth," says Ng.

"But, while our stable outlook assumes that the the general business environment will remain supportive to banks' credit quality, we remain mindful of various downside risks, more particularly the risk of asset quality deterioration after several consecutive years of rapid credit growth and because of a certain level of political uncertainty, given the approach of the presidential election in 2014," says Ng.

In regard to funding and liquidity, the report says that with credit growth expected to continue outpacing deposit growth, the system's loan-to-deposit ratio (LDR) should trend higher in 2013, up from its 15-year high of 84%. But liquidity risks remain limited.

Profitability will be supported by strong credit expansion, low credit costs, and stronger fee income offsetting a modest squeeze on net interest margins and a rise in overheads. Moody's-rated Indonesian banks are further heading for another strong year of profits in 2013.

Finally, on systemic support, the report notes that the government has a history of providing support in past crises. The concentration of a large share of deposits among rated banks presents a strong incentive for government support.

On the other hand, the Moody's report also notes that the government's involvement in the banking system remains strong. It controls 35% of the system's assets through its stakes in four state-owned banks and, as such, there is a risk of the government distorting lending. Indonesia is also overcrowded in terms of its number of financial institutions. As of September 2012, it had 120 entities.

Moody's rates nine of the largest 10 banks in Indonesia, including all four state-owned banks. They collectively account for 60% of system assets. Their bank financial strength ratings range from D- to D+. Moody's stable outlook for the Indonesian banking system is consistent with the stable ratings outlooks for the Indonesian government.