Photo credit: Bank Danamon

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the Baa2/P-2 local and foreign currency deposit ratings of Bank Danamon Indonesia TBK (P.T.) (BDI). The outlook on the ratings is maintained at stable.

At the same time, Moody’s has affirmed the bank’s Baseline Credit
Assessment (BCA) of baa3, adjusted BCA of baa2, counterparty risk ratings at Baa1/P-2 and counterparty risk assessment (CR Assessment) at Baa1(cr)/P-2(cr).

RATINGS RATIONALE

The affirmation of BDI’s BCA at baa3 reflects Moody’s expectation that the bank will continue to maintain strong capital, good profitability and asset quality will continue to stabilize over the next 12-18 months.

The successful reduction in the micro-financing portfolio has resulted in improved asset quality. Consequently profitability has also improved over the past 12-18 months, driven by a gradual decline in credit costs.

The BCA also factors in BDMN‘ weaker funding structure than that of its domestic peers and Moody’s expectation of a reduction in the bank’s stock of liquid assets over the next 12-18 months, as a result of faster loan growth.

At the same time, the BCA affirmation reflects Moody’s expectation that BDI’ standalone financial profile will not be materially impacted by the proposed merger with another domestic bank, Bank Nusantara Parahyangan (BNP), given the small size of BNP relative to BDI, with BDI as the
surviving bank.

BNP is a small bank in Indonesia with total assets that are around 5% of BDI’, that is majority owned by MUFG. The merger plan between BDI and BNP will facilitate MUFG increasing its ownership stake in BDI and comply with Indonesia’ single presence policy. According to the plan, BDI will acquire all of BNP’ assets and liabilities in exchange for new shares that will be issued to BNP’s existing shareholders.

The affirmation of BDI’ Baa2 deposit ratings takes into account the
bank’s adjusted BCA of baa2, which incorporates affiliate support from the bank’ majority shareholder, MUFG. Moody’s assumes MUFG Bank, Ltd.(MUFG, A1 stable, a3) will successfully increase its ownership stake in BDI to around 75 percent from the current 40 percent.

Moody’s affiliate support assumption incorporates MUFG’s strategic
investment in BDI and intention to increase its ownership stake in the bank, as well as MUFG’s track record of demonstrating strong commitment to overseas investments. The high level of affiliate support results in a one-notch uplift to BDI’s BCA to baa2 from baa3.

In addition, BDI’s ratings incorporate a high level of government
support, given its sizable market share of system deposits and relative systemic importance. The bank’s ratings receive no further uplift from government support, because its adjusted BCA is already at the same level as Indonesia’s Baa2 sovereign rating.

WHAT COULD CHANGE THE RATINGS UP/DOWN

BDI’s ratings are already at the same level as the sovereign rating, and an upgrade is unlikely unless the sovereign rating of Indonesia is upgraded, and provided the bank’s financial strength remains robust.

BDI’s ratings could be downgraded if the sovereign rating or the bank’ BCA is downgraded, or if Moody’s assesses the strategic importance of BDI to MUFG has reduced.

Negative pressure on the bank’ BCA could arise from a substantial
deterioration in the bank’s asset quality while its loss buffer
substantially contracts, and/or if the bank’s profitability weakens
materially.

LIST OF AFFECTED RATINGS/ASSESSMENTS

– Long-term local and foreign currency bank deposit ratings affirmed at Baa2; outlook stable

– Short-term local and foreign currency bank deposit ratings affirmed at P-2

– BCA affirmed at baa3

– Adjusted BCA affirmed at baa2

– CR Assessment affirmed at Baa1(cr)/P-2(cr)

– Long-term local and foreign currency counterparty risk ratings affirmed at Baa1

– Short-term local and foreign currency counterparty risk ratings
affirmed at P-2

– Outlook for the bank maintained at stable

Bank Danamon Indonesia TBK (P.T.), headquartered in Jakarta, reported total assets of IDR178.6 trillion (USD12.8 billion) on 30 September 2018.

Written by Staff Editor, Email: theinsiderstories@gmail.com