Jakarta. The strong profitability and capitalization of Indonesian lenders — amongst the highest in Asian region — would offer protection against the heightened market volatility from higher US interest rates, Fitch Ratings said in a report on Tuesday.

The international ratings agency said that Indonesia’s top four banks in the country’s banking system have shown resilient profitability, thanks to its funding franchise, despite greater volatility throughout 2014.

Such resilience was not seen in the country’s second-tier banks, which suffered from margin pressures and higher loan impairment charges — provisions sidelined by banks to cover bad loans.

“This suggests greater sensitivity to market volatility for the less systemically important banks, and we expect divergence in the performance trend to play out further in 2015,” the Fitch Ratings report said.

The US Federal Reserve has hinted since 2013 that it would begin tapering its loose monetary policy by raising interest rates as the US economy surges.

The effect will vary, but it may drain capital from emerging markets and into dollar assets.

Market analysts and investors have predicted the rate hike is likely to happen in July, but it could be later given US dollar gains against other currencies have been stronger than expected.

Fitch’s report noted Indonesia’s greater exposure to foreign-currency loans than other Asia economies is a source of risk.

“The exposure has partly funded the commodity sector, which has been hit by both a weaker currency and falling commodity prices,” Fitch added.

Foreign currency loans are highest at foreign-owned banks operating in Indonesia such as OCBC NISP, Bank Internasional Indonesia and CIMB Niaga.

But the report said the exposure to foreign exchange loans “has been relatively stable and does not appear excessive.”

The report also highlighted possible concerns in Indonesia’s banking system.

The report cited the strong chance that a high interest rate environment would cause banks, especially those with weaker funding, to pay higher costs. This would eventually lead to an increase in impairment costs.

Fitch in November reaffirmed Indonesia’s sovereign credit rating at BBB-, or investment-grade status.

GlobeAsia

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Source: The Jakarta Globe