(Sept 15): Indonesia’s state-owned banks face rising credit and earnings risks after government-driven lending pushed loan growth to more than twice the industry pace, according to S&P Global Ratings.

The surge in lower-yielding loans coincides with higher funding costs, and S&P expects net interest margins at state-owned banks to fall 10 to 20 basis points over the next 12 to 18 months, analysts led by Nikita Anand wrote in a report.

The warning comes amid sovereign wealth fund Danantara’s efforts to repair financially stretched state companies while pushing President Prabowo Subianto’s ambitious spending agenda. Debt accumulated by some state-owned enterprises has already forced restructurings, raising questions over how much funding will be needed to clean up the sector and whether that could divert resources from new investments.

Loans at the three state banks rated by S&P — PT Bank Mandiri, PT Bank Rakyat Indonesia and PT Bank Negara Indonesia — surged 26% on average from a year earlier as of June, more than double the industry’s 12% pace. The growth, driven largely by lending to SOEs and government programs, has exceeded S&P’s forecasts and the banks’ own guidance, the rating company said.

A test of the asset quality of SOE loans will come later this month, when PT Agrinas Pangan Nusantara, a Danantara-controlled firm overseeing Prabowo’s village cooperative program, is due to make its first repayment, S&P said. Loans to Agrinas account for about 2% to 6% of total lending at each of Bank Mandiri, Bank Rakyat and and Bank Negara, it said.

“While the loans are not guaranteed, the banks can claim any shortfalls from the government,” S&P analysts said, adding that the efficiency of that mechanism has yet to be tested. “Given the large ticket size of SOE loans, a default could lead to a spike in credit costs and a decline in earnings and capitalisation.”

Loan growth at state lenders could slow to 8% to 10% over the next year as liquidity tightens and banks repay short-term debt, S&P said. A healthy capitalisation, with a tier 1 capital ratio of 16% to 20% provides a buffer to the state-controlled banks, it said.

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