The central bank (Bank Indonesia/BI) is scheduled to announce its policy on the benchmark rate-BI 7-days Repurchase Repo Rate-today or tomorrow, which many expect a rise following Fed rate hike move on Wednesday (Sep 26). Fitch Ratings said higher interest rates will put upward pressure on banks’ funding costs, and may weigh on GDP growth and asset quality. The major bank’s ‘special-mention’ loans, which were equivalent to 5.2% of total loans at end-1H18 – up from 4.4% at end-2017 – would be at higher risk of becoming NPLs should economic conditions worsen.
Profitability is likely to decline in the near term due to higher credit and funding costs, as well as slower loan growth, but we expect the large banks’ average ROA (2.1% in 1H18) to remain strong compared with regional peers. Major banks’ tighter underwriting and risk controls since the 2015-2016 commodity-sector downturn are likely to contain the deterioration in asset quality.