NPL ratio is expected to climb to 4%, although earnings and provisioning are sighted to improve.

The recovery of Indonesian banks and lenders will be drawn out as the pandemic continues to impact their credit conditions, reports S&P Global Ratings.

Similar to their Malaysian peers, Indonesian lenders’ recovery hinges on strong domestic economic growth and vaccine rollouts. Any rebound in infections and associated containment issues will cause delay to economic recovery and, in turn, present key risks to banks, S&P said in a media note.

Notably, local banks’ non-performing loan (NPL) ratio are sighted to climb to 4% in 2021.

"Indonesian banks' reported NPLs will likely spike once regulatory relief measures are phased out," said S&P Global Ratings credit analyst Nikita Anand. "Banks have made heavy provisions in 2020 for expected credit losses, and provisions are likely to stay elevated at 2.5%-3% of total loans in 2021."

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Reported NPLs showed only a moderate increase in 2020: 3% for PT Bank Mandiri and PT Bank Rakyat Indonesia, compared with the systemwide average of 2.6% in 2019.

Meanwhile, PT Bank Negara Indonesia reported a sharper NPL increase, rising 2 percentage points to 4.3% in 2020 from only 2.3% in 2019. This was driven by loan-book cleanups in the fourth quarter of 2020.

In total, a sizable 18% of systemwide loans have been restructured due to COVID-19, reports S&P. These restructured loans can be classified as performing until March 2022.

On the upside, banks’ earnings are expected to increase to 1.7% up to 1.9% of assets in 2021, an improvement from the 1.6% in 2020. However, this is still below pre-COVID levels of 2.5%.

Bank provisioning expenses are also likely to be lower than 2020 but will stay higher than the historical average, S&P added.

Meanwhile, Anand says that Indonesian banks' capitalization should stay strong, and S&P overall assumes single-digit growth in lending and better earnings in 2021.