Indonesian government unveils plans to inject capital in state-owned banks

As it revealed a USD715m capital for Bank Mandiri.

It has been noted that the Indonesian government's plan to inject IDR9trn (USD715m) in capital for the country's largest lender, Bank Mandiri, underscores the strong capitalisation in the banking sector.

According to a release from Fitch Ratings, Indonesian banks' moderate risk profiles are backed by comfortable loss-absorption cushions, and they are well positioned to withstand a reasonably high degree of asset quality stress - owing to high core capital buffers and profitability. Fitch maintains a stable outlook on the sector's ratings.

Bank Mandiri will raise the IDR9trn in capital through a rights issue as part of a broader government plan to inject IDR48trn (USD3.8bn) into state-linked businesses, mainly in the infrastructure sector.

Bank Mandiri's core capital position, which was 14.6% as of end-September 2014, is lower than the industry average (17.9%). Mandiri's pro forma Tier 1 capital will increase to 16.3% following the capital injection.

The government has also announced plans to inject additional capital into other state-owned banks in the next few years, and lower dividend payments to strengthen their capital positions further.

High profitability, with the sector's return on assets at around 2.9% as of end-October 2014, gives Indonesia's banks a healthy buffer in the event of a downturn.

Here's more from Fitch Ratings:

In a stress test conducted by Fitch, Indonesia's nine largest banks - representing 65% of system assets - were estimated to incur average credit costs of 4.2% of total loans based on the NPL formation rate rising by three times from 1.2% of the total loan book for 3Q14.

The stress tests also assumed greater default risks for those loans classified as "special mention" loans, those undergoing restructuring, or those denominated in foreign currencies.

Such credit costs would be comfortably covered by pre-provision profit. As such, the risk of capital impairment was also found to be low under the assessed stressed environment.

The major Indonesian banks are likely to maintain high core capitalisation over the medium term, as indicated by the Mandiri rights issue and dividend reduction. Other banks have also opted to focus on capital preservation, including higher profit retention and lower loan-growth targets.

The improved capital ratio also reflects in part a slowdown in loan growth to 12.8% yoy in October 2014, down from 22.2% a year earlier. This came alongside a broader macroeconomic adjustment and rebalancing in 2013 and 2014, where real GDP growth and inflation declined.

The slowdown has resulted in mildly worsening asset quality for the banks, with the NPL ratio rising slightly to 2.3% in 3Q14 from 1.8% in 4Q13.

The NPL ratio should remain between 2%-3% in 2015. Fitch expects real GDP growth to pick up to 5.4% this year, from an estimated 5.1% in 2014, which should support credit quality.