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NEWS UPDATES Asean Affairs   17  December 2010

Moody's Lifts Outlook on Indonesian Banks

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Moody's Investors Service has raised the outlook for Indonesia's banks to stable despite continuing challenges.

Beatrice Woo, a Moody's vice president and senior credit officer, said the operating environment was relatively good despite an unsettled political situation.

"Relative to their low ratings, the credit-worthiness of Indonesian banks is intact despite the strain of the financial crisis," she said.

"Based on our assessment, their key performance indicators and capital levels will remain stable, or even strengthen over the next four to six quarters."

"Overall, capital levels have held up and asset quality and credit costs will be contained or continue to improve.

"In addition, liquidity risks will remain low, and management teams have shown their ability to respond quickly to adverse conditions."

Moody's had said last year that the outlook for the Indonesian banking system was negative in the next 12 to 18 months as banks faced increasing pressures, particularly on asset quality.

Moody's assesses the top 10 lenders in Indonesia on their financial strength, with ratings from D+ to D- and baseline credit scores from Ba1 to Ba3.

The agency has pegged all the banks' foreign currency deposit ratings at Ba3 while ranking their local currency ratings at Baa3.

The banks evaluated by Moody's are expected to continue their strong performance over the next 12 months.

The lenders include state-owned Bank Mandiri, Bank Negara Indonesia, Bank Raykat Indonesia and Bank Tabungan Negara. The 10 lenders hold about two-thirds of the nation's deposits.

Many of the banks enjoyed record profits in 2009, although their results were boosted by one-time gains such as bond issues.

As a group, earnings jumped 42 percent this year through September.

Aside from delivering the outlook, Moody's highlighted obstacles to the banks' success, including lackluster law enforcement and courts to deal with rampant graft, a political scene marred by infighting and weak transparency.

The agency also noted that the state holds a quarter of the total assets in the financial system.

The negatives include banks owing large debts to the government for financial bailouts, and there were concerns that the lenders' capital levels could sustain credit growth.

According to the report, the nation's vigorous loan growth could severely strain the system, requiring banks to exercise more caution to avoid disbursing bad loans.

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