Fitch Ratings-Jakarta/Singapore-24 August 2015: The NPLs of Indonesian mine and mine services companies are likely to rise further in the short term, says Fitch Ratings, after reaching multi-year highs thus far in 2015. A combination of sustained weak coal prices and over-supply will continue to challenge the credit profiles of the mining sector, with smaller miners most at risk. This will have a major impact on mining sector-related asset quality at Indonesias banks, though their credit remains well-buffered by strong capitalisation.
Thermal coal prices have continued to decline amidst weak demand, especially from China, and Fitch does not foresee a near-term catalyst to reverse this downtrend. The Indonesian benchmark coal reference price has more than halved since its peak in 2011, while falling by 9% year-to-date. As prices fell steadily, miners sought to boost production through to end-2014 to compensate for lower cash margins per unit sold, further exacerbating the downtrend in prices.
This is changing, however, with Indonesias total production falling by around 20% thus far in 2015. The six largest coal miners, which account for around 60% of Indonesias total thermal coal production, are mostly maintaining their output. This means that medium- to small-scale miners are finally cutting production or have halted production entirely. A large share of the coal mining-related exposure of Indonesian banks is likely to be to medium- to small-scale miners - given the debt-free operations of some of the largest Indonesian thermal coal miners, and greater reliance on debt capital markets or international banks.
That said, maintaining production at a time of falling prices has not been sufficient to halt a marked decline in revenue and profitability among all of the large miners since FY11, and this downward trend is likely to continue in FY15 and FY16.
The weakening position of mining and related sectors has contributed to deteriorating asset quality for the banking sector as a whole. The latest data for end-May shows NPLs as a percentage of gross loans rising to 2.6% versus 2.2% at end-2014. NPL formation has accelerated: NPL growth had risen to over 33% yoy in April, from 12% during the same period in 2014. Mining and mining-related construction have been among the hardest hit sectors, with NPLs rising to 3.4% for total mining and quarrying, and 5.5% for construction lending.
Major banks direct mining exposure is relatively limited. The two large banks with the greatest exposure are BNI and Mandiri, where mining sector loans accounted for just over 6% of total loans at end-2014. The direct exposure for every other large bank is around 3% or less. That said, large banks also have indirect exposure to the mining sector through construction loans for mining projects. It is important to note, too, that broader macroeconomic weakness is likely to lead to continued asset-quality weakening across multiple sectors and not just mining.
Worsening asset quality should have some impact on large banks profitability, but they are coming from a position of strength. Large Indonesian banks benefit from the strongest capitalisation and profitability in the region, with an aggregate sector Tier 1 capital adequacy ratio of 18.0% and return on assets of 2.6% as of May 2015. This will continue to provide a buffer for bank ratings amid broader macroeconomic weakness.
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Posted by : admin [ 8/26/2015 4:06:00 AM ]