Fitch Upgrades BTPN; Affirms KEB Hana, ICBC Indonesia and BNP
At the same time, Fitch has affirmed the National Short-Term Ratings of the four banks at 'F1+(idn)'. A full list of rating actions is provided at the end of this commentary.
'AAA' National Ratings denote the highest rating 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' National 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' National Ratings indicate the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. On Fitch'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
The upgrade of BTPN's National Long-Term Rating reflects Fitch's view that its parent Sumitomo Mitsui Banking Corporation (SMBC; A-/Stable) has a higher propensity to provide support, in case of need, to its Indonesian subsidiary. This is evident from SMBC's more active operational involvement through the appointment of key personnel from SMBC, which underscores BTPN's increasing, albeit still limited, importance to SMBC.
The affirmation of the National Ratings for KEB Hana, ICBC Indonesia and BNP reflects Fitch's view of parental support and linkage for the three banks. Fitch believes timely support for KEB Hana, ICBC Indonesia and BNP is highly likely to be forthcoming from their higher-rated parents, namely Korea-based Hana Bank and Korean Exchange Bank (A-/Stable), Industrial and Commercial Bank of China (ICBC; A/Stable) and ACOM Co., Ltd (A-/Stable), respectively. ACOM is 40% owned by Mitsubishi UFJ Financial Group, Inc.'s (MUFG) group banks.
In line with its criteria on rating financial institution subsidiaries and holding companies, the agency classifies KEB Hana, ICBC Indonesia and BNP as strategically important subsidiaries for their respective parents.
BNP predominantly engages in the SME market while ICBC Indonesia's loan portfolio is mainly derived from larger corporations. KEB Hana's loan portfolio is proportionately distributed between SME and commercial segments. BTPN focuses on the niches of lending to pensioners and micro lending.
The capital positions of the four banks remain satisfactory with their Fitch core capital (FCC) at 15%-25% at end-3Q14, although this could be easily eroded by the banks' aspirations for higher loan growth. Profitability is likely to be subdued due to intense competition for low-cost funding with larger peer banks, with the four banks' at a disadvantage because of their smaller and limited franchises. Their fee generation is also likely to continue to be modest.
The asset quality of KEB Hana, ICBC Indonesia and BTPN could come under pressure because of their appetite for loan growth. BNP's asset quality has weakened, with its non-performing loan (NPL) ratio rising to 2.6% at end-September 2014 from 0.9% at end-2013. This was mainly driven by asset quality deterioration in the real estate and construction sector. Fitch expects BNP's NPL ratio to remain high in the near future amid the high interest rate environment.
Fitch expects the loan/deposit ratios (LDR) of KEB Hana, ICBC Indonesia and BTPN to remain high in the near term as they seek higher loan growth, while the ratio will likely be lower for BNP as the bank pursues slower loan growth this year. The Indonesian authorities have allowed KEB Hana, ICBC Indonesia and BTPN to have LDRs above the regulatory maximum of 92% because they managed to maintain their total capital adequacy ratios above the minimum 14%. The liquidity risks associated with high loan growth are mitigated by parental liquidity support, which Fitch expects to be forthcoming, in time of need.
RATING SENSITIVITIES - National Ratings
Downward rating pressure on the four banks may arise from any developments leading to a weakening of perceived support from their parents, such as major changes to ownership or a significant weakening in their parents' finances, although Fitch believes this to be a remote prospect in the near to medium term.
The ratings on KEB Hana, ICBC Indonesia and BNP are already at the upper end of the National Ratings scale. New evidence of stronger linkage between BTPN and SMBC such as the parent increasing its stake in the subsidiary, stronger integration in areas such as risk management and greater involvement in management may result in a rating upgrade for BTPN.
RATING SENSITIVITIES - Debt Ratings
The ratings of the banks' rupiah-denominated senior bonds are the same as their National Long-Term Ratings in accordance with Fitch criteria. Any changes in the National Long-Term Ratings would affect these issue ratings
The full list of rating actions is as follows;
KEB Hana
National Long-Term rating affirmed at 'AAA(idn)'; Outlook Stable
National Short-Term rating affirmed at 'F1+(idn)'
BNP
National Long-Term rating affirmed at 'AAA(idn)'; Outlook Stable
National Short-Term rating affirmed at 'F1+(idn)'
ICBC Indonesia
National Long-Term rating affirmed at 'AAA(idn)'; Outlook Stable
National Short-Term rating affirmed at 'F1+(idn)'
Medium Term Notes 2014 affirmed at 'AAA(idn)' and 'F1+(idn)'
BTPN
National Long-Term rating upgraded to 'AA+(idn)' from 'AA(idn)'; Outlook Stable
National Short-Term rating affirmed at 'F1+(idn)'
Senior Unsecured Bond II & III BTPN 2010 upgraded to 'AA+(idn)' from 'AA(idn)'
Bond programme I BTPN 2011 and its tranches under the program upgraded to 'AA+(idn)' from 'AA(idn)'
Bond programme II BTPN 2013 and its tranches under the program upgraded to 'AA+(idn)' from 'AA(idn)'
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