Fitch Ratings Indonesia has affirmed the national ratings of seven Indonesian regional development banks - Photo by ANTARA.

JAKARTA (TheInsiderStories) – Fitch Ratings Indonesia has affirmed the national ratings of seven Indonesian regional development banks. They reflect Fitch’s view that the banks are important to the development of Indonesia’s regional economies, indicated by market shares of up to 25 percent of total assets in their respective regions, but are only of limited systemic importance at the national level.

The bank’s outlook is stable, includes PT Bank Pembangunan Daerah Bali (BPD Bali), PT Bank Pembangunan Daerah Banten, Tbk (Bank Banten), PT Bank Pembangunan Daerah Jambi (Bank Jambi), PT Bank Pembangunan Daerah Lampung (Bank Lampung), PT Bank Pembangunan Daerah Maluku dan Maluku Utara (Bank Maluku), PT Bank Pembangunan Daerah Riau Kepri (Bank Riau Kepri), and PT Bank Pembangunan Daerah Sulawesi Utara Gorontalo (Bank Sulutgo).

“Fitch has simultaneously withdrawn the ratings on Bank Lampung as the issuer has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings,” the rating agency said in a statement on Monday (01/13).

Fitch has also assigned senior unsecured debt ratings of ‘A(idn)’ to Bank Jambi and Bank Sulutgo, the agency said.

The rating actions for national long-term rating for Bank Bali and Bank Banten affirmed at ‘A(idn)’, then Bank Jambi national long-term rating affirmed at ‘A(idn)’; rupiah senior unsecured medium-term notes affirmed at ‘A(idn)’, rupiah senior unsecured sharia medium-term notes affirmed at ‘A(idn)’, and senior unsecured debt rating assigned at ‘A(idn)’.

While, Bank Lampung national long-term rating affirmed at ‘A(idn)’ and withdrawn; short-term rating affirmed at ‘F1(idn)’ and withdrawn, and rupiah senior bonds affirmed at ‘A(idn)’ and withdrawn. Then, Bank Maluku national long-term rating affirmed at ‘A(idn)’; short-term rating affirmed at ‘F1(idn)’ and rupiah senior unsecured bonds affirmed at ‘A(idn)’.

Futhermore, Bank Riau Keprin national long-term rating affirmed at ‘A(idn)’; and short-term rating affirmed at ‘F1(idn)’. While Bank Sulutgo
national long-term rating affirmed at ‘A(idn)’; and short-term rating affirmed at ‘F1(idn)’, senior unsecured debt rating assigned at ‘A(idn)’.

The agency said ‘A’ national long-term ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union. While ‘F1′ national short-term ratings indicate the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country.

Weak corporate governance standards and risk management pose a constraint on the regional development banks’ standalone credit profiles, which do not drive their ratings, it said.

The banks’ core business is lending to civil servants in their regions, which accounted for 53-97 percent of the banks’ total lending portfolios at end-9M19. Fitch believes this type of lending has lower risk, as installments are deducted directly from the borrowers’ salaries that are paid through the banks.

However, credit standards and loan quality at the banks’ other segments – usually related to government projects, loans to SMEs, consumers, and micro-businesses – are typically much weaker, reflected in segmental non-performing loan ratios that can significantly exceed the industry’s 2.7 percent average.

Profitability and capitalization at the rated regional development banks, with the exception of Bank Banten, remain generally satisfactory. Their wide net interest margins from their high-yielding civil-servant loans should continue to underpin their satisfactory earnings. Fitch believes that capital should be adequate to support the banks’ near- to medium-term expansion, as loan growth is likely to be moderate.

Bank Banten’s weak asset quality, which stems from legacy SME loans, has resulted in recurring net losses that have eroded the bank’s equity. Its total capital ratio of 10.0 percent at end-9M19 was at its minimum requirement of 10.0 percent.

Bank Banten expects to receive a capital injection this year from the Banten provincial government, which has been approved in the regional budget since 2018 but has been delayed beyond its original schedule. Fitch believes that capital support from its shareholders will be crucial to maintaining its regulatory capital ratios above its minimum requirements.

The banks’ deposit-dominated funding profiles are subject to some seasonal variation and concentration risk as the regional governments and state-owned enterprises are typically among their largest depositors. The banks’ loan-to-deposit ratios often spike in the fourth quarter as the regional governments usually withdraw some deposits for budget spending towards the end of each year.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com