Fitch Affirms Ratings on Indonesian State-Owned Banks
'AAA(idn)' National Long-Term Ratings denote the highest ratings assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.
'AA(idn)' National Long-Term Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.
'F1(idn)' National Short-Term Ratings indicate the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Under the agency's National Rating scale, this rating is assigned to the lowest default risk relative to others in the same country. Where the liquidity profile is particularly strong, a "+" is added to the assigned rating.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The state-owned banks' Issuer Default Ratings (IDRs) and National Ratings are support driven and, together with their Support Ratings (SRs) and Support Rating Floors (SRFs), reflect the high probability they would continue to receive state support in times of need. This is based on the banks' relative systemic importance in the Indonesian economy, including the degree of their policy roles - especially in the case of BTN and Indoexim - as well as the government's majority ownership in each of them. The four commercial banks (Mandiri, BRI, BNI and BTN) together accounted for around 41% of total banking system assets at end-1H16. The National Long-Term Ratings on BNI and BTN are lower than those of Mandiri and BRI to reflect Fitch's view of their lower systemic importance (at around 8% and 3% of total system assets at 1H16, respectively).
The National Ratings of MTF and BRIS reflect Fitch's expectation of a strong probability of extraordinary support from their respective parents, if needed. Fitch views MTF as a strategically important subsidiary in Mandiri's consumer finance business based on its 51%-ownership, common brand name and strong linkages between parent and subsidiary. Fitch views BRIS as playing a key role in expanding BRI's sharia banking business in Indonesia. BRIS is rated one notch lower from its parent to take into account its limited significance in terms of contribution to the parent's overall franchise.
VIABILITY RATINGS
The Viability Ratings (VRs) of Mandiri, BRI and BNI consider the sub-investment grade operating environment for banks in Indonesia that has a high influence on their standalone credit profiles. Banks in Indonesia face challenges that arise from the continued weakness in global commodity markets and the renewed market volatility surrounding China's economic slowdown. Nevertheless, the banks' credit profiles, which have been enhanced since the late 1980s through several cycles, are likely to allow them to be resilient through expected levels of volatility.
Mandiri's VR of 'bb+' reflects its position as the largest bank Indonesia, with around 15% share of system assets at 1H16, its good level of capitalisation relative to overall risk appetite, above-peer profitability and, notwithstanding a significant deterioration during 1H16, a still-manageable asset quality. The bank's NPL ratio rose to 3.9% at end-1H16, above the industry average of around 3.1%, as it suffered from a more prolonged downturn in the economic environment than it had originally foreseen. Credit costs have also risen, which puts pressure on profitability; but Fitch expects asset-quality deterioration to moderate and the bank's profitability and provision coverage to remain sufficient to absorb potential credit losses.
BRI's VR of 'bb+' reflects its position as the second-largest bank with around 14% share of system assets; its distribution network that is the most extensive among peers and an unchallenged franchise in rural micro-lending; profitability that is better than that of its peers, with its focus on micro businesses helping it to generate strong margins; and a capital position that is considered good for its overall risk appetite. Its asset quality is likely to weaken in line with the industry, but will continue to be mitigated by its strong credit fundamentals, which are underpinned by its diversified credit exposures.
BNI's VR of 'bb+' reflects its position as Indonesia's fourth-largest bank, and its satisfactory capitalisation, profitability and asset quality. However, in Fitch's view, BNI's appetite for loan growth in the riskier commercial segment is higher than that of Mandiri and BRI, which can be seen in its above-industry-average growth of 9.5% during 1H16. Fitch believes that this increases the risk to the bank's asset quality in the future. However, Fitch expects these risks to remain manageable for BNI and the bank's satisfactory profitability and capital buffers should enable it to withstand any potential increase in credit costs.
Indoexim is 100% owned by the government of Indonesia and it plays an important policy role in supporting and developing Indonesia's export industry, an area of strategic importance to the country's economic development. No VR is assigned to Indoexim as Fitch views that it is less meaningful to analytically assess such a policy-related institution on a standalone basis.
SENIOR DEBT
The banks' rupiah and foreign-currency denominated senior bonds and bond programmes are rated at the same levels as their IDRs and their National Long-Term and Short-Term Ratings, in accordance with Fitch's rating criteria.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
Changes to Indonesia's sovereign rating (BBB-/Stable) may lead to corresponding changes to the banks' ratings. Deterioration in the state-owned banks' standalone financial profiles alone is unlikely to impact their IDRs and National Ratings unless the factors underpinning state support also weaken. The National Ratings of BNI and BTN could be upgraded if we view that the systemic importance of these banks has increased. A change in the government's ability and willingness to provide extraordinary support would also affect these banks' IDRs, National Ratings, SRs and SRFs. Fitch will review the potential impact on SRs and SRFs as further key details and supporting regulations for the Financial System Crisis Prevention and Mitigation Law become available.
The National Ratings of MTF and BRIS are sensitive to changes in their parent's National Ratings. Any significant dilution in ownership or perceived weakening of support from the parents would be negative for the subsidiaries' National Ratings. However, Fitch sees this prospect as remote in the foreseeable future given the subsidiaries importance to their parents businesses. For MTF, a material increase in ownership, leading to greater integration between parent and subsidiary, and stronger control by Mandiri of MTF could narrow the rating differential between the two entities. For BRIS, positive rating action could arise if there is evidence of a significant increase in BRIS's contribution to BRI in terms of revenue, profit, franchise or other synergies.
VIABILITY RATINGS
Rating upside on the VRs may result from fundamental improvements in the operating environment, including in the capital markets and the economy, better corporate governance, and a more visible improvement in the banks' risk management cultures. Rating downside may result from significant asset-quality deterioration and weakened loss-absorption buffers, particularly in a sharp protracted downturn.
SENIOR DEBT
Any changes in the IDRs, National Long-Term and Short-Term Ratings would affect the ratings on the banks' rupiah and foreign-currency denominated senior bonds and bond programmes.
The full list of rating actions is as follows:
Mandiri:
- Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed at 'F3'
- Support Rating Floor affirmed at 'BBB-'
- Support Rating affirmed at '2'
- Viability Rating affirmed at 'bb+'
- National Long-Term Rating affirmed at 'AAA(idn)'; Outlook Stable
- National Short-Term Rating affirmed at 'F1+(idn)'
BRI:
- Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed at 'F3'
- Support Rating Floor affirmed at 'BBB-'
- Support Rating affirmed at '2'
- Viability Rating affirmed at 'bb+'
- National Long-Term Rating affirmed at 'AAA(idn)'; Outlook Stable
- National Short-Term Rating affirmed at 'F1+(idn)'
- Senior unsecured rating affirmed at 'BBB-'
- Medium-term notes affirmed at 'AAA(idn)'
BNI:
- Long-Term Foreign-Currency affirmed at 'BBB-'; Outlook Stable
- Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed at 'F3'
- Support Rating Floor affirmed at 'BBB-'
- Support Rating affirmed at '2'
- Viability Rating affirmed at 'bb+'
- National Long-Term Rating affirmed at 'AA+(idn)'; Outlook Stable
- National Short-Term Rating affirmed at 'F1+(idn)'
- Senior unsecured rating affirmed at 'BBB-'
BTN
- National Long-Term Rating affirmed at 'AA(idn)'; Outlook Stable
- National Short-Term Rating affirmed at 'F1+(idn)'
- Senior unsecured rating affirmed at 'AA(idn)'
Indoexim
- Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Stable Outlook
- Short-Term Foreign-Currency IDR affirmed at 'F3'
- Support Rating Floor affirmed at 'BBB-'
- Support Rating affirmed at '2'
- Senior unsecured EMTN programme affirmed at 'BBB-'
MTF
- National Long-Term Rating affirmed at 'AA(idn)'; Outlook Stable
- National Short-Term Rating affirmed at 'F1+(idn)'
BRIS
- National Long-Term Rating affirmed at 'AA+(idn)'; Outlook Stable
- National Short-Term Rating affirmed at 'F1+(idn)'
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