Fitch upgrades Indonesian state-owned banks

Jakarta: Fitch Ratings has upgraded the Viability Rating (VR) of Indonesian state-owned bank, PT Bank Rakyat Indonesia (Persero) Tbk (BRI), to ‘bbb-‘ from ‘bb+’. Fitch has also affirmed BRI’s Issuer Default Ratings (IDRs), which are now driven by its VR, and the IDRs of four other Indonesian state-owned banks – PT Bank Mandiri (Persero) Tbk (Mandiri), PT Bank Negara Indonesia (Persero) Tbk (BNI), Lembaga Pembiayaan Ekspor Indonesia (Indoexim) and BRI’s subsidiary, PT Bank BRIsyariah Tbk (BRIS).

At the same time Fitch Ratings Indonesia has affirmed the National Ratings on BRI, Mandiri, BNI, PT Bank Tabungan Negara (Persero) Tbk (BTN), BRIS and the ratings of two of Mandiri’s subsidiaries – PT Bank Mandiri Taspen (Bank Mantap) and PT Mandiri Tunas Finance (MTF). The rating Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary.

‘AAA(idn)’ Long-Term National 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)’ Long-Term 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(idn)’ Short-Term National 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.

The IDRs and National Ratings of Indoexim, Mandiri, BNI and BTN are support driven, while those of BRI are underpinned by our expectations of sovereign support.

The banks’ Support Ratings and Support Rating Floors reflect a high probability that the banks will receive state support in time of need. BTN’s Support Rating and Support Rating Floor reflect a moderate prospect for sovereign support. Fitch’s assessment is based on the banks’ respective relative systemic importance in the Indonesian economy, the degree of their commercial operations and the state’s majority ownership.

The National Long-Term Ratings on BNI and BTN – which had a market share at around 9.5% and 3.5%, respectively, of total system assets at 1Q18 – are lower than those of Mandiri and BRI – which have around 15% share of total assets – to reflect Fitch’s view of their lower systemic importance.

Fitch equalises Indoexim’s IDR and Support Rating Floor with the Sovereign Rating of Indonesia (BBB/Stable), as the bank is fully state-owned and plays an important policy role in supporting and developing the country’s export industry, an area of strategic importance to Indonesia’s economic development.

The IDR and National Ratings of BRIS and National Ratings of Bank Mantap and MTF reflect Fitch’s expectation of a strong probability of extraordinary support from their respective parents, if needed. Fitch views BRIS, Bank Mantap and MTF as strategically important subsidiaries that have key roles in expanding their parents’ sharia banking, pension lending and consumer finance businesses, respectively. The subsidiaries’ importance to their parents is also reflected in their operational alignment in key areas, common branding and majority ownership.

The upgrade of BRI’s VR reflects Fitch’s view that the bank will build on its position as Indonesia’s largest bank and sustain its above-peer profitability and satisfactory capital as the operating environment strengthens. Its distribution network is the most extensive in the industry and it has an unchallenged franchise in rural micro-lending that supports its higher margins. Asset quality slightly weakened during 1Q18, but it is still better than that of most peers and will remain supported by strong credit fundamentals that are underpinned by the bank’s diversified credit exposure.

The affirmation of Mandiri’s and BNI’s VR considers the improving operating environment and the bank’s satisfactory capitalisation and profitability, which are among the best in the industry. However, the two banks’ profitability is weaker compared with that of BRI, as evidenced in consistently lower return on assets over the previous few years stemming from a greater proportion of lower-yielding corporate lending in their portfolios. The VRs also reflect risk controls that, although acceptable, Fitch deems as less robust than those of some peers.

Fitch expects Mandiri’s asset quality to continue to gradually improve in line with the domestic economy. Its non-performing loan ratio of 3.3% at end-1Q18 (end-2016: 4.0%) remained higher than the 2.8% industry average, as the bank suffered from a more prolonged downturn in the economic environment than Fitch had expected. BNI’s higher-than-industry loan growth target of 13%-16% in 2018 (industry: 10%-12%) could weigh on its capital strength.

BRI, Mandiri and BNI are among Indonesia’s largest commercial banks and their funding profiles benefit from their state-ownership, industry-leading franchises and broad distribution networks. This helps the banks maintain lower funding costs than most peers.

All banks face risks from potential volatility from interest-rate hikes by the US Federal Reserve, rising domestic interest rates and lower commodity prices. Fitch expects rate hikes to remain gradual rather than sharp and the state-owned banks should be well placed to mitigate associated risks. A sharp decline in commodity prices is not Fitch’s base case.

No VR is assigned to Indoexim, as Fitch does not believe it is meaningful to analyse the policy-related institution on a standalone basis.