JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed Lembaga Pembiayaan Ekspor Indonesia‘ (Indonesia Eximbank) long-term local and foreign currency issuer ratings of Baa2. The financing firm owned by Indonesian government under Ministry of Finance.

Moody’s has also affirmed the bank’ long-term and short-term foreign  currency Euro medium-term note (MTN) program ratings of (P)Baa2 and (P)Prime-2 respectively, as well as its long-term foreign currency senior unsecured debt ratings of Baa2.

At the same time, Moody’s has downgraded the bank’ Baseline Credit Assessment (BCA) to b2 from ba3. The ratings outlook is stable.

Moody’s has applied its new Finance Companies rating methodology to derive Indonesia Eximbank’ standalone credit profile. Moody’s uses this methodology to rate finance companies globally, except in jurisdictions where certain regulatory requirements must be fulfilled prior to the new methodology’s implementation.

Moody’s has also withdrawn the outlooks on existing instrument-level ratings of Indonesia Eximbank for its own business reasons. Over the course of this year, Moody’s will be withdrawing all instrument-level ratings for entities rated under the Finance Companies rating methodology. The withdrawal has no impact on the ratings outlook for the company.

RATINGS RATIONALE

The affirmation of Indonesia Eximbank’ Baa2 long-term ratings reflects Moody’s assessment that the bank will receive extraordinary support from the Government of Indonesia (Baa2 stable) in times of need.

Moody’s assumes a very high level of government support because of the bank’ quasi-sovereign status, as reflected in the establishment under the Act of the Republic of Indonesia No. 2 2009.

The Act specifies the government’s sole ownership and full control over the bank, the bank’ policy role as the country’s export credit agency, and the capital support from the government, if the bank’s capital falls below a specified threshold.

The ratings are six notches higher than Indonesia Eximbank‘ BCA of b2, because of Moody’s assumption of a very high level of government support.

The downgrade of Indonesia Eximbank’ BCA is driven by the deterioration in the bank’s asset quality, which was in turn because of its rapid expansion in commodity-related transactions, in accordance with its policy mandate. Commercial banks were unwilling to underwrite these transactions.

Consequently, nonperforming loans (NPLs) and restructured loans rose quickly, because commodity prices remained subdued. High single-party concentration is also one of the contributing factors
to the bank’s weak asset quality.

In the fourth quarter of 2018, Indonesia Eximbank‘ NPL ratio increased significantly to 13.7 percent from 6.2 percent in the previous quarter, because of an internal portfolio review to identify problematic accounts. Moody’s expects that asset risks will remain elevated, given potential slippages from performing restructured loans. These loans constituted 8.9 percent of the bank’ portfolio at the end of 2018.

Profitability over the next 12 to 18 months will continue to come under pressure because of potential slippages from restructured loans, and the low loan-loss coverage ratio will result in continued high provisioning costs. Indonesia Eximbank‘ loan-loss coverage ratio was significantly below the industry average and stood at 31.7 percent at the end of 2018.

During 2018, the surge in NPLs resulted in the sharp decline of Indonesia Eximbank’ net profit to IDR172 billion from IDR1.02 trillion the year before.

Indonesia Eximbank held a relatively low level of liquid assets (10.3 percent of total assets) at the end of 2018. The bank is also more susceptible to external market conditions than domestic commercial banks, due to its reliance on wholesale funding. Refinancing risks are, however, mitigated because of the bank’s quasi-sovereign status, which provides it access to the global markets.

Indonesia Eximbank‘ capital remained strong at the end of 2018. The bank’ Tier 1 capital ratio stood at 16.8% as of the same date, supported by past capital infusions from the Indonesian government. Moody’s expects capital support from the government to be forthcoming, given the government’ track record.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade of the sovereign rating would lead to an upgrade of Indonesia Eximbank’ long-term ratings, assuming the sovereign’s willingness to provide support remains strong. Moody’s could also upgrade the bank’s BCA if its asset quality improves. Higher profitability or liquidity will also exert upward pressure on the bank’ BCA.

A downgrade of the sovereign rating would lead to a downgrade of Indonesia  Eximbank‘ long-term ratings. A decline in the willingness of the sovereign to provide support could also exert downward pressure on the bank’ long-term ratings.

Moody’s could downgrade the bank’s BCA if its asset quality deteriorates further, or capital declines, without any indication of capital injections from the government. Lower profitability or liquidity will also exert downward pressure on the bank’s BCA.

Lembaga Pembiayaan Ekspor Indonesia (Indonesia Eximbank) is headquartered in Jakarta, and reported total assets of IDR120 trillion at Dec. 31, 2018.

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