Moody's Investors Service on Friday (01/10) has affirmed the Baa2 long-term local and foreign currency deposit ratings of PT Bank Tabungan Negara, Tbk (IDX: BTN) - Photo: ANTARA.

JAKARTA (TheInsiderStories) – Moody’s Investors Service on Friday (01/10) has affirmed the Baa2 long-term local and foreign currency deposit ratings of PT Bank Tabungan Negara Tbk (IDX: BBTN). It also affirmed the bank’s Baseline Credit Assessment (BCA) and Adjusted BCA of ba1.

At the same time, Moody’s has assigned a Ba3 (hyb) subordinated rating to the bank’s proposed USD-denominated Tier 2 capital securities, with the rating subject to Moody’s review of the final documents. The outlook on the ratings, where applicable, is maintained at stable.

“BTN’s Baa2 long-term local and foreign currency deposit ratings are two notches higher than the bank’s ba1 BCA, because we incorporate two notches of uplift reflecting Moody’s assessment of a very high probability of support from the Government of Indonesia (Baa2 stable), in times of need,” Moody’s said.

The support assumption is predicated on the government’s 60 percent ownership of BTN, the bank’s policy role in supporting the government’s homeownership program, and the bank’s systemic importance as one of the largest banks in Indonesia by deposits, it said.

The affirmation of BTN’s BCA reflects the bank’s market position as the largest housing lender with a market share of 40 percent as of 30 September 2019, with a near-monopoly in the subsidized mortgage market. The bank also receives funding support from government-related entities, in addition to the government.

The BCA also incorporates Moody’s expectation that BTN’s asset quality will remain under pressure, while its profitability and capitalization will modestly recover over the next 12-18 months. BTN’s nonperforming loan ratio increased to 3.5 percent on 30 September 2019 from 3.2 percent a year ago. An elevated level of restructured loans further increases the bank’s asset risk.

Moody’s expects BTN’s asset quality to remain under pressure over the next 12-18 months, as a result of its aggressive loan expansion activities since 2015 per the government’s housing program. In addition, the slowing domestic economy will weigh on the debt
servicing ability of the bank’s borrowers, especially given its concentration in low and middle-income segments and exposure to small and mid-sized developers.

Nevertheless, Moody’s expects BTN’s profitability will modestly improve over the next 12-18 months, as its credit costs will normalize when the bank’s loan-loss buffer increases as a result of the implementation of Pernyataan Standar Akuntansi Keuangan (PSAK) 71 in January 2020 – the equivalent of International Financial Reporting Standards 9.

The bank’s funding costs will also decline following the central bank’s cuts in reserve requirements and policy rate, as well as following easing liquidity conditions. Moody’s also anticipates a steady recovery in BTN’s capitalization and a modest loan growth rate of around 6 percent for 2020. Nevertheless, the bank’s Common Equity Tier 1 ratio will be reduced by more than 300 basis points when PSAK 71 is implemented, according to the bank’s management.

Moody’s does not have any particular governance concerns for BTN, and therefore does not apply any corporate behavior adjustment to its BCA. Moody’s views the bank’s risk management commensurate with its risk appetite.

Proposed Tier 2 Capital Securities

The Ba3 (hyb) rating assigned to BTN‘s proposed Tier 2 capital securities is two notches below BTN’s ba1 Adjusted BCA, in line with Moody’s notching guidance for contractual non-viability subordinated debt.

The Ba3 (hyb) rating reflects: (1) the subordination of these securities in liquidation; and (2) the potential uncertainty regarding the timing of the write-down, as these securities may be forced to absorb losses near (but before) the point of non-viability, as a way to avoid a bank-wide resolution.

Moody’s does not include any additional notching for the coupon-skip mechanism embedded in these securities. This is because the bank will likely be close to the point of non-viability when the mechanism is triggered, with low incremental losses due to skipped coupons.

As these Tier 2 capital securities are intended to provide loss absorption, the Ba3 (hyb) rating does not benefit from any uplift due to government support. Under the draft terms of the bank’s Tier 2 capital securities, these securities constitute direct, unsecured and subordinated obligations of the bank and rank pari passu with all other subordinated debt classified as Tier 2 capital.

In addition, the principal and interest – including arrears of interest – of these securities will be partially or fully written down in the event that the bank’s Common Equity Tier 1 ratio breaches 5.125 percent; the government plans to rescue the bank by injecting capital; the regulator exercises discretion based on other circumstances.

Interest payments are also required to be deferred on a cumulative basis if the bank is unlikely to meet the regulatory capital requirements. The deferral of interest payment does not constitute an event of default.

Moody’s said BTN’s long-term deposit ratings are at the same level as Indonesia’s sovereign rating. Given the stable outlook on the sovereign rating, an upgrade of the bank’s deposit ratings is unlikely.

Nevertheless, Moody’s could upgrade the bank’s BCA and subordinate rating if there is a sustained improvement in the bank’s asset quality, particularly in its non-subsidized mortgages and construction loans. Higher profitability supported by stronger access to low-cost deposits could also exert upward pressure on the bank’s BCA and subordinate rating.

A downgrade of the sovereign rating would lead to a downgrade of BTN’s long-term deposit ratings. In addition, Moody’s could downgrade the bank’s BCA and subordinate rating if the bank’s asset quality deteriorates further, particularly in its non-subsidized mortgages and construction loans. A further decline in its capitalization could also exert downward pressure on the BCA and subordinate rating.

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