Indonesian banks have maintainedstrong financial fundamentals despite recent market fluctuations and governance reforms.
· Moody's remains confident in the stability of Indonesia's banking sector.
· Recent governance changes have caused short-term market volatility.
· The government’s continued backing is expected to bolster bank resilience.
Strong fundamentals amid external volatility
In March, Indonesia's sovereign wealth fund, Danantara, declared its board and advisors to allayfears over governance and political influence. The creation of this fundresulted in a sharp fall in Indonesia's equity market on 18 March, affecting some of the country's biggest banks. Despite this volatility, Moody's Ratings confirmed the inherent resilience of the banks in the country, applauding their stable financial position.
Even though the market recently fluctuated, Moody's indicated that Indonesian banks' fundamentals are still strong. One of the most important reasons is that the banks have minimal exposure to currency risks because their foreign exchange positions are modest. Additionally, most of their dollar loans are made to exporters, which can counteract potential problems resulting from currency depreciation.
Governance changes and outlook
The recent ownership transfer of key state-owned banks to Danantara has raised some concerns among investors. The banks, such as Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia, are now under new hands, with the possibility of changes in board composition and future business direction. Nonetheless, given the volatility attached to these reforms, Moody's anticipates the Indonesian government holding on to a high level of support for such banks to maintain their stability.
While Moody's forecasts that funding, capital and liquidity ratios will soften marginally over the next few years, government support is not expected to change. The government also intends to raise dividend payments by state-owned entities, including the banks, which should assist in the preservation of investor confidence and offer further financial stability.
In the long run, robust loan growth, particularly in segments like affordable housing, will remain a focus area for these banks. Nevertheless, the surge in demand for housing loans may put pressure on their liquidity, especially for subsidised mortgage lender Bank Tabungan Negara (BTN). Nevertheless, the government support, combined with strategic alliances, should be able to cushion any possible funding gaps.
Indonesian banks are expected to remain resilient despite market challenges and governance reforms. Their strong financial foundations, withgovernment backing and strategic loan growth initiatives, position them well to face the challenges ahead.