Indonesian banks tout sound profitability and capitalisation

Only a fraction of restructured loans will become bad loans, Fitch said.

Indonesian banks’ bad loans are expected to fall further in 2024, as economic growth will support asset quality, according to Fitch Ratings.

The ratio of loans at risk to total lending stood at 3.7% at end-2023, a far cry from the 16% in 2020.

“We expect only a fraction of restructured loans to migrate into NPLs, allowing the system NPL ratio to remain near the end-2023 level of 2.2%, its lowest since 2014,” Fitch said in a report on Indonesian banks operating environment (OE) score.

Economic growth and improving loan portfolios will also support Indonesian banks’ profitability and bolster its OE score, which is currently at ‘bbb’, similar to Thailand and Malaysia.

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Indonesia is expected to log a GDP growth of 4.9% in 2024 and 5.3% in 2025, extending the 5% rise in 2023. 

The banking sector’s profitability has also exceeded pre-pandemic levels, Fitch added.

“We believe any policy rate cuts in H2 2024 should be positive for bank net interest margins (NIMs), as they would ease liquidity and lower their cost of funds,” the rating agency said.

Both profitability and capitalization levels are high compared with other major regional banking systems in the ‘bbb’ OE score category, such as Thailand and Malaysia. 

Indonesia’s common equity Tier 1 (CET1) ratio is forecasted to climb to 26% by end-2023.