An improving economy should support better loan recoveries.
Indonesian finance and leasing companies can expect better sector conditions in 2021 and a steady improvement, reports Fitch Ratings.
The sector's recovery will likely be gradual, with moderate asset-quality risks to persist. Loan demand is forecasted to remain tepid, as sales of big-ticket items such as consumer vehicles will take longer to recover even as the economy regains momentum.
Furthermore, the industry's exposure to higher-risk borrowers and significant restructured receivables—in excess of 30% of total industry lending—will continue to place pressure on near-term delinquencies, added Fitch.
But conditions will nonetheless improve from 2020, driven by an expected economic recovery and steadier funding markets, following weak industry performance in 2020 due to the economic impact of the coronavirus pandemic.
“[An] improving economy should support better loan recoveries, and we expect pre-emptive credit provisioning undertaken in 2020 to cushion profitability,” Fitch noted.
Indonesian gross domestic product (GDP) growth is likely to reach 6.2% in 2021 following a 2% contraction this year. GDP contracted by 3.5% YoY in Q3, slowing from the 5.3% reduction recorded in Q2. Fitch expects this strengthening to continue assuming no severe re-imposition of social distancing measures which could derail any economic recovery.
Furthermore, the industry has returned to profitability in Q3, with annualised pre-tax profit/average assets of 2.5% in the quarter—reversing the overall loss of -1.2% of average assets in Q2, although lower than the 4.8% in 2019.The improvement stemmed from higher revenue and easing credit costs, which fell to 3.9% of average assets during Q3 from 6.8% in the previous quarter.
Funding conditions should also remain stable, according to Fitch, especially for companies with resilient performance or those owned by stronger parents, which collectively account for a significant portion of the industry market share. Modest industry growth should also ease any pressure on funding needs and balance-sheet leverage.
“However, we see continued funding risks for weaker-performing entities such as those with NPF ratios above the industry average, or sustained weak profitability without a stronger parent to provide a funding backstop,” the agency added.
The industry’s non-performing financing ratio also remained high as of 9M 2020 but had declined gradually to 4.9% from its peak of 5.6% in July.
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