Indonesian finance and leasing companies should expect stabilising sector conditions in 2021, says Fitch Ratings.

This should be 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, the rating agency said.

The sector’s recovery will be gradual, and Fitch expects moderate asset-quality risks to persist. Loan demand is likely to remain tepid, as sales of big-ticket items such as consumer vehicles will take longer to recover even as the economy regains momentum.

Meanwhile, the industry’s exposure to higher-risk borrowers and significantly restructured receivables – over 30% of total industry lending – will continue to place pressure on near-term delinquencies.

Nevertheless, an improving economy should support better loan recoveries, and we expect pre-emptive credit provisioning undertaken in 2020 to cushion profitability, Fitch said.

Fitch said it expects “Indonesian GDP growth to reach 6.2% in 2021 (the 2020 estimate is: -2.0%). GDP contracted by 3.5% YoY in the third quarter of 2020, an improvement from the 5.3% reduction recorded in 2Q20, and we expect this strengthening to continue, assuming no severe re-imposition of social distancing measures which could derail any economic recovery.

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Indonesian finance and leasing

In a report, Fitch said:

“The industry non-performing financing (NPF) ratio remained high as of 9M20, but had declined gradually to 4.9% from its peak of 5.6% in July 2020.

“This belies stronger performance of several entities that Fitch rates towards the higher end of the peer group, which have typically reported asset-quality performance better than the industry average.

“The pace of new restructuring has also diminished since most social distancing restrictions were lifted in June 2020.

“Pandemic-related loan-restructuring relief has been extended for another year in Indonesia, until March 2022 at least, but Fitch expects non-bank lenders to be judicious in applying such relief to maintain repayment discipline among borrowers.

“The industry has also returned to profitability in 3Q20, with annualised pre-tax profit/average assets of 2.5% in the quarter, from an overall loss of -1.2% of average assets in 2Q20 (2019: 4.8%).

“The improvement stemmed from higher revenue and easing credit costs, which fell to 3.9% of average assets during 3Q20 from 6.8% in the previous quarter.

“Funding conditions should remain stable, 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.

“Our expectations for Indonesia’s finance and leasing sector tie in with our stable sector outlook for Asia-Pacific emerging-market finance and leasing companies in 2021, driven by Fitch’s expectations of sector performance across the region’s three key markets – China, India and Indonesia.”