Moody’s Upgrades Ratings of Nine Indonesian Financial Institutions to Baa2

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Singapore, April 13, 2018 — Moody’s Investors Service has upgraded the ratings and, where applicable, the deposit, issuer and senior unsecured debt ratings of nine financial institutions in Indonesia which include seven banks and two finance companies to Baa2.

The affected banks are: (1) Bank Mandiri (P.T.) (Mandiri); (2) Bank Rakyat Indonesia (P.T.) (BRI); (3) Bank Central Asia Tbk (P.T.) (Bank Central Asia); (4) Bank Negara Indonesia TBK (P.T.) (BNI); (5) PT Bank CIMB Niaga Tbk (CIMB Niaga); (6) Bank Tabungan Negara (P.T.) (BTN); and (7) Bank Danamon Indonesia TBK (P.T.) (BDI).

Moody’s has also revised the outlooks for the ratings of these seven banks to stable from positive.

The affected finance companies are: (1) Astra Sedaya Finance (P.T.) (ASF) and (2) Lembaga Pembiayaan Ekspor Indonesia (Indonesia Eximbank). Moody’s has revised the outlook for Indonesia Eximbank to stable from positive and maintained the stable outlook of ASF.

The deposit ratings, baseline credit assessment (BCA) and adjusted BCA of Bank Permata TBK (P.T.) (Bank Permata) have been affirmed. Its rating outlook has been changed to stable from negative.

In the case of BRI and Bank Central Asia, Moody’s has also upgraded their BCAs and adjusted BCAs to baa2 from baa3.

At the same time, the counterparty risk assessments of BNI, BTN and Bank Permata have been upgraded to Baa2(cr)/P-2(cr) from Baa3(cr)/P-3(cr).

For BRI and Bank Central Asia Tbk (P.T.), the counterparty risk assessments have been upgraded to Baa1(cr) from Baa2(cr), while the counterparty risk assessments of Mandiri, CIMB Niaga and BDI have been affirmed at Baa2(cr)/P-2(cr).

In addition, the P-3 short-term deposit ratings of Mandiri, BRI, Bank Central Asia, BNI, CIMB Niaga, BTN and BDI have been upgraded to P-2.

The P-3 short-term deposit ratings of Bank Permata has been affirmed.

The rating actions follow the upgrade of Indonesia’s sovereign rating to Baa2, and the change in the outlook to stable from positive on 13 April 2018.

Ratings Rationale

Today’s rating actions on the 10 Indonesian financial institutions  aredriven by Moody’s upgrade of Indonesia’s sovereign rating to Baa2.

The key drivers of the revision to Indonesia’s sovereign ratings are:

1) Indonesia’s focus on fiscal and monetary policy around preserving macroeconomic stability and building financial buffers. These policies and larger financial reserves strengthen Indonesia’s capacity to respond to shocks, corresponding to a solidification of the country’s
institutions.

2) Indonesia has established a track record of prioritizing macroeconomic stability over promoting short-term growth on top of effective policy coordination between government institutions which keep inflation stable at low levels.

Indonesia’s credit strength is a key input in Moody’s deposit and debt ratings for financial institutions in the country, because it affects Moody’s assessment of the government’s capacity to provide support in times of stress.

Moody’s upgrade of the Indonesian government’s rating to Baa2 from Baa3 has raised the supported ratings for most Moody’s-rated financial institutions in the country by way of a widening of the government support notching.

For more information on the sovereign credit rating action, please refer to the Government of Indonesia issuer page on www.moodys.com.

UPGRADE OF THE DEPOSIT RATINGS OF FIVE BANKS DRIVEN BY A WIDENING OF SYSTEMIC SUPPORT UPLIFT

The deposit ratings of five banks — Mandiri, BNI, CIMB Niaga, BTN and BDI — incorporate Moody’s assumptions of High to Very High probability of government support for the banks in times of need.

Moody’s government support assumption is driven by the relative systemic importance of the affected banks to the Indonesian banking system as well as, in the case of government-owned banks, their ownership structures.

In light of these support assumptions, the upgrade of the sovereign rating leads to a one-notch widening of systemic support uplift to the five banks’ deposit ratings.

UPGRADE OF DEPOSIT RATINGS OF BRI AND BANK CENTRAL ASIA DRIVEN BY AN
UPGRADE OF THEIR BCAs

BRI:

BRI’s upgraded Baa2 deposits ratings reflect the bank’s upgraded BCA of baa2. The bank’s ratings do not incorporate any uplift based on sovereign support as the BCA is already at the same level as the sovereign rating.

Until now, the bank’s BCA was constrained by the country’s sovereign rating. With the upgrade of the sovereign rating, this constraint has been removed, and the bank’s BCA is positioned now at its financial profile of baa2.

The bank’s BCA reflects its stable asset-quality metrics, highly profitable micro-financing franchise, and its well-capitalized and liquid balance sheet. While the bank has also seen some deterioration in its asset quality over the last three years, its gross NPL ratio has remained
stable and ranged between 1.7% and 2.2% from 2014 to 2017.

Moody’s expects BRI’s asset quality to stabilize over the next 12-18 months owing to an improving operating environment.

Bank Central Asia:

Bank Central Asia’s upgraded Baa2 deposits ratings reflect the bank’s upgraded BCA of baa2. The bank’s ratings do not incorporate any uplift based on sovereign support as the BCA is already at the same level as the sovereign rating.

The bank’s BCA has been constrained by the sovereign rating as the financial profile of the bank is baa1. Accordingly, the upgrade in the sovereign rating has resulted in the bank’s BCA moving up by one notch to baa2. At the same time, the bank’s BCA continues to be constrained by Indonesia’s sovereign rating.

The bank’s BCA is supported by its (1) consistently strong profitability, above-industry-average asset quality and robust capitalization; and (2) market position as the largest transaction bank in Indonesia, which continues to support its solid funding profile.

DEPOSIT RATINGS OF PERMATA AFFIRMED; OUTLOOK REVISED TO STABLE

Bank Permata’s Baa3 deposit ratings incorporate the bank’s ba2 BCA and a two-notch uplift to reflect Moody’s expectation of continued support from its key shareholders and the government of Indonesia (Baa2 stable).

The revision of the outlook on the Baa3 ratings to stable from negative reflects the bank’s stabilizing asset quality and profitability, which alleviate the downside risks on its BCA.

Bank Permata’s asset quality has stabilized over the past 12 months from a combination of management action taken to address and contain the problem loans that began to surface in the second half of 2015, as well as gradually improving operating conditions in Indonesia.

In 2017, the bank underwent an extensive review of its loan portfolio to identify problem exposures. It also tightened credit underwriting standards and set aside resources to focus on problem loan recovery, including disposal to third parties. The pace of new loan restructuring also slowed over the course of 2017, reflecting improved stability in the overall asset quality of the bank.

In line with the bank’s stabilizing asset quality, credit costs also moderated in 2017. Total credit costs fell to 126% of pre-provision income in 2017, after reaching all-time high of 367% in 2016. While credit costs remain elevated and continue to be a drag on overall profitability, the bank’s return on assets recovered to 0.5% in 2017 after suffering a net loss a year ago.

In addition, the bank also undertook two rounds of capital strengthening in 2016 and 2017 to boost its loss-absorption buffers as it worked through its asset quality problems.

SENIOR UNSECURED RATINGS OF TWO FINANCE COMPANIES UPGRADED TO Baa2

The senior unsecured MTN ratings of ASF have been upgraded to (P)Baa2 to incorporate three notches of affiliate support uplift from its parent Astra International.

Until now, the senior debt ratings of ASF were positioned at the same level as the sovereign rating, even though the affiliate support architecture allowed for a higher rating outcome.

With funding and liquidity being the key areas of relative credit weakness for ASF, Moody’s believed that it would not be appropriate to expect that the funding and liquidity profiles of ASF would be more resilient than that of the sovereign, notwithstanding support that would be forthcoming from Astra International.

With the sovereign rating upgraded, that consideration is no longer relevant and hence ASF’s ratings now incorporate the full benefit of support from Astra International.

The assumptions of a high level of support from Astra International are driven by the strong strategic fit between the Astra International auto finance business and ASF and the majority ownership of ASF by Astra International.

LEMBAGA PEMBIAYAAN EKSPOR INDONESIA (Indonesia Eximbank)

The senior unsecured ratings of Indonesia Eximbank have been upgraded to Baa2, driven by a widening of systemic support uplift.

The ratings incorporate an assumption of a very high level of support from the government, driven by: (1) the bank’s strong relationship with the government, reflected by its ownership structure, clear policy role as an export credit agency and quasi-sovereign status under its legal mandate; and (2) the consideration that the legal mandate that established the bank incorporates strong support language with regard to capital, funding and liquidity support from the government.

This high level of support translates into its issuer ratings being positioned at the same level as the government’s sovereign rating.

WHAT COULD MOVE THE RATING UP/DOWN

The ratings of Mandiri, BRI and Bank Central Asia could be upgraded, if the sovereign’s foreign-currency debt rating is upgraded.

The ratings of BNI, CIMB Niaga, BTN, BDI and Indonesia Eximbank could be upgraded if both the sovereign rating and the individual banks’ BCAs are upgraded.

The ratings of ASF could be upgraded, if both its standalone credit profile and the sovereign rating is upgraded.

Conversely, the above financial institutions’ ratings could be downgraded if the sovereign rating is downgraded and/or there is material deterioration of their standalone financial metrics.

Bank Permata’s deposit ratings and adjusted BCA would be upgraded if its BCA is upgraded.

The bank’s ba2 BCA could be upgraded if its asset quality exhibits a track record of consistent improvement through a significant slowdown in non-performing loan (NPL) and restructured loan formation rates; and if credit costs — as a percentage of pre-provision income — decline
substantially and stabilize at levels close to industry averages; and if its capital levels improve.

Conversely, Bank Permata’s deposit ratings, adjusted BCA and Counter partyRisk (CR) assessments would be downgraded if its BCA is downgraded.

Bank Permata’s BCA could be downgraded if there is a sharp increase in its NPLs and restructured loans and/or a continued decline in its core capital buffer because of high credit costs and/or rapid credit growth. An erosion of its liquidity profile will also be negative for the BCA.

The financial institutions are headquartered in Jakarta, and reported total assets at the end of December 2017 of :

Bank Mandiri (P.T.): IDR1,124 trillion ($83 billion)

Bank Rakyat Indonesia (P.T.): IDR1,126 trillion ($83 billion)

Bank Central Asia Tbk (P.T.): IDR750 trillion ($55 billion)

Bank Negara Indonesia TBK (P.T.): IDR709 trillion ($52 billion)

PT Bank CIMB Niaga Tbk: IDR266 trillion ($20 billion)

Bank Tabungan Negara (P.T.): IDR261 trillion ($19 billion

Bank Danamon Indonesia TBK (P.T.): IDR178 trillion ($13 billion)

Bank Permata TBK (P.T.): IDR148 trillion ($11 billion)

Astra Sedaya Finance (P.T.): IDR30 trillion ($2 billion)

Lembaga Pembiayaan Ekspor Indonesia : IDR110 trillion ($8 billion)

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