Indonesia bank rally imperilled by sluggish lending, bad loans

Bloomberg

The rally in Indonesian bank stocks may be nearing an end amid sluggish credit growth and tougher regulations for loan quality assessments.
Equity analysts are now downgrading banking stocks after the Jakarta Finance Index rallied 21 percent this year—more than double that of the main gauge—as they expect nonperforming loans in the $527 billion industry to creep up again. Lenders may need to set aside bigger buffers against bad loans after the Financial Services Authority of Indonesia, known as OJK, decided against extending a rule first introduced in 2015 that allowed for looser provisioning terms.
Demand for credit has been disappointing. The central bank last month cut its 2017 loan-growth target to a range of 8-to-10 percent after previously forecasting 10-to-12 percent. Compare that with a whopping near-20 percent growth in the past decade. Bank Indonesia’s surprise rate cut last month has yet to kick-start demand for loans.
“Banking stocks have rallied so much this year that it is hard for investors to expect more upside to them, especially with the not-so positive outlook and the rich valuation,” said Jemmy Paul, investment director at PT Sucorinvest Asset Management. “Prices have to come down from what they are right now for me to put in more money to the banking stocks.”
This year’s rally has been fueled by expectations for a recovery in Southeast Asia’s biggest economy and an investment grade nod by S&P Global Ratings. Improvement in asset quality also prompted speculation that banks could refocus their attention on lending after cleaning up their books in the past two years.
Paul, whose Sucorinvest Equity Fund has outperformed 97 percent of its peers in the past year, says rich valuations and slowing loan growth makes it hard to justify buying more bank stocks.