Fitch: Positive outlook for Indo banks - Insider Stories

Fitch Ratings said that the rating outlook on Indonesian banks is positive, reflecting the sovereign's sound economic prospects.
"With steady economic growth predicted for 2011, loan growth should remain robust at around 20% albeit slower than in 2010, partly due to large corporates exploring cheaper funding from the bond market," said Julita Wikana, Director in Fitch's Financial Institutions group, in a press statement today.
Barring any severe knock-on effects from a still uncertain global economy, Fitch expects the banks to continue delivering sound profitability in 2011 as robust loan demand and manageable credit costs offset competitive pressure and potentially higher funding costs.

The long-term issuer default ratings (IDRs) of seven Indonesian banks were revised to positive, following the change in Indonesia's sovereign outlook.
Fitch notes that the build-up of loans in the special-mention category and rapid loan growth poses some risks.

The agency believes special-mention loans will remain high as the fast-growing loans portfolio becomes more seasoned and interest rates gradually rise in line with higher inflation.
However, on balance, the agency expects asset quality and credit cost to remain manageable in 2011 amid favorable local economic conditions.
"Satisfactory provisioning and capital also provide a reasonable buffer for any unexpected knock-on effects from a still uncertain global economic environment," added Wikana
Nevertheless, loan growth and Basel II operational risk are likely to pressure capital ratios.

In general, Fitch believes that the Indonesian banks may benefit from more capital-restorative measures to support stronger business growth and to maintain an adequate capital buffer.
The agency further notes that some banks are trying to bolster core capital by injecting equity and lowering dividend payouts.
The overall banking system loan to deposit ratio (LDR) is likely to increase as banks step up lending activities to meet internal profitability targets as well as regulatory targets for LDRs.
As liquidity tightens in line with strong economic growth, Fitch believes the major banks are better positioned than the smaller banks to compete for customer deposits, given their stronger franchises.