Indonesian banks' capitalisation to be broadly stable

Thanks to high core profitability and loan loss coverage ratios.

Despite potential faster loan growth, Indonesian banks will continue to feature broadly stable capitalisation, says Moody's.

"Indonesian banks benefit from structurally high core profitability and loan loss coverage ratios compared to their peers in other systems. This provides them with strong buffers to withstand asset quality deterioration, which in our view has already peaked in 2016," it adds.

Here's more from Moody's:

As a result, the system's rebounding loan growth and receding credit costs will provide them with ample internal capital generation capacity to support their asset growth. The system's Tier 1 ratio, at above 21% at end-March 2017, put it well above other Asian systems.

The rated bank aggregate Tier 1 ratio rose from 16.4% at end-2015 to 19.6% at end-2016, helped in part by an October 2015 tax incentive, that lowered the tax on gains on fixed assets following revaluation, and robust internal capital generation (return on assets of 1.8% over 2016 amid slower risk weighted asset growth of 9%).

The tax rate was reduced from 10% to 3%, with the incentive lasting till end-2016, leading banks to revalue their fixed assets, which led to a rise in revaluation surplus. Rated banks experienced a 160 bps increase in aggregate Tier 1 ratios as a result of the revaluation.