Moody's stressed that Indonesia and India are very vulnerable to the potential decline in the company' debt repayment ability - Photo: Privacy

JAKARTA (TheInsiderStories)–Moody’s Investors Service has affirmed the deposit ratings of nine Indonesian banks. The affected banks are: (1) Bank Rakyat Indonesia (P.T.) (BRI); (2) Bank Mandiri (P.T.); (3) Bank Central Asia Tbk (P.T.); (4) Bank Negara Indonesia TBK (P.T.) (BNI); (5) Bank Tabungan Negara (P.T.) (BTN); (6) PT Bank CIMB Niaga Tbk; (7) Pan Indonesia Bank TBK (P.T.) (Panin); (8) Bank Danamon Indonesia TBK (P.T.) (BDI); and (9) Bank Permata TBK (P.T.).

Moody’s has also upgraded the baseline credit assessments (BCAs) of BNI and BDI to baa3 from ba1, and the BCAs of BTN, CIMB Niaga and Panin to ba1 from ba2. The BCAs of the other four affected banks are affirmed: BRI and Bank Central Asia at baa2; Mandiri at baa3; and Permata at ba2. The outlooks on the ratings of the nine affected Indonesian banks remain stable.

AFFIRMATION OF BANK RATINGS IN RESPONSE TO IMPROVING OPERATING CONDITIONS

Moody’s expects that operating conditions in Indonesia (Baa2 stable) will continue to improve. In particular, the rebound in global trade and the recovery in global commodity prices will support a pickup in domestic economic growth.

Stabilizing commodity prices will be positive for income levels and domestic sentiment. Moody’s expects the positive momentum will translate into improved growth prospects and stabilizing asset quality for the banking system.

Moody’s also believes that the banking sector is emerging from the bottom of the credit cycle, as evidenced by the broad-based stabilization in the pace of the formation of new problem assets and the gradual recovery in loan demand.

As a result, Moody’s has changed the Macro Profile for Indonesia to “Moderate+” from “Moderate”, with an improvement in the country’s banking country risk score to “Strong-” from “Moderate+”.

The affirmation of the banks’ ratings reflects Moody’s view that the upside and downside risks to the banking sector are equally balanced. In addition, the standalone credit profiles or BCAs of a number of banks could experience upward pressure, when the asset quality cycle improves and profitability recovers further.

UPGRADE OF BCAs — BNI, BTN, CIMB NIAGA, PANIN and BDI

The upgrade of BNI’s BCA to baa3 from ba1 reflects the improvement in the bank’s standalone credit strength over the last three years (2015-17), underpinned by its superior funding franchise in Indonesia, which in turns supports its robust profitability and capitalization.

Credit costs will remain elevated, as the bank works through its asset quality issues. However, the drag on its profitability will begin to ease, as asset quality pressures continue to stabilize over the next 12-18 months.

The upgrade of BTN’s BCA to ba1 from ba2 reflects the stabilizing asset quality, as a result of the bank’s refocus on subsidized mortgages and tightened underwriting criteria on its commercial loans. This situation will add strength to BTN’s profitability and capitalization metrics.

The BCA upgrade also incorporates Moody’s view of the bank’s stable funding and liquidity, which have steadily supported its policy role of providing mortgages in line with the country’s home ownership program.

The upgrade of CIMB Niaga’s BCA to ba1 from ba2 reflects the bank’s improved profitability and capitalization and stabilizing asset quality over the past three years. Following the significant deterioration in asset quality in 2014, the bank took on a more cautious stance on new lending, as it resolved its problem assets. In addition, its funding improved, as a result of the good momentum in growing its low-cost core customer deposits.

The upgrade of Panin’s BCA to ba1 from ba2 reflects the bank’s stabilizing asset quality as a result of conservative loan growth over the past three years, which has resulted in an improvement in its profitability and capitalization. The BCA upgrade also incorporates Moody’s view of the bank’s stable funding and liquidity.

The upgrade of BDI’s BCA to baa3 from ba1 takes into account the bank’s strong capitalization relative to its peer banks in Indonesia, and stabilizing asset quality pressures that are partly supported by its strategy to shift away from the mass-market segment and its conservative stance on credit growth over the past three years. The BCA upgrade also incorporates Moody’s view of the bank’s stable funding and liquidity, which remains constrained by its small deposit franchise.

AFFIRMATION OF BCAs – BRI, MANDIRI, BANK CENTRAL ASIA, and PERMATA

The affirmations of the BCAs for BRI, Mandiri, Bank Central Asia, and Permata reflect Moody’s expectations that the banks’ credit profiles will broadly remain stable over the next 12-18 months. Asset quality metrics will continue to stabilize on the back of a slower new problem loan formation rate, alongside improving operating conditions.

However, elevated credit costs will continue to weigh on profitability and capital generation, and bank capital levels may begin to decline from current high levels, as loan demand gradually picks up. Moreover, funding and liquidity for these banks remain stable in light of their low reliance on market funds and stable liquidity.

AFFILIATE SUPPORT REMAINS AN IMPORTANT RATING CONSIDERATION FOR CIMB NIAGA, BDI AND PERMATA

The adjusted BCAs of CIMB Niaga, BDI and Permata take into account their standalone credit strength and Moody’s assumption of support from their respective foreign bank shareholders. The adjusted BCA of Permata is affirmed at ba1.

After taking into account the rating actions on the BCAs, Moody’s has upgraded the adjusted BCAs of CIMB Niaga to baa2 from baa3 and BDI to baa2 from baa3.

GOVERNMENT SUPPORT ASSUMPTIONS FOR AFFECTED INDONESIAN BANKS

Moody’s considers Indonesia a high support system, because of the importance of the banking system to the overall economy, as well as the government’s demonstrated past record of systemic support.

Moody’s incorporates a very high level of government support into the deposit ratings of Bank Central Asia, given its position as the third-largest bank in the country by total assets, deposits and gross loans, and as the country’s largest bank for the payment and settlement of bills.

Moody’s also incorporates a very high level of government support into the deposit ratings of BRI, Mandiri, BNI, and BTN, given their positions as the largest state-owned banks in the country, their significant market shares of system deposits, and their critical roles in the country’s economic development.

For BRI and Bank Central Asia, the banks’ ratings do not receive an uplift, because their BCAs of baa2 are already at the same level as Indonesia’s sovereign rating of Baa2. For Mandiri, BNI and BTN, Moody’s support assumptions result in the banks’ deposit ratings being positioned at the same level as the sovereign rating of Baa2.

Moody’s incorporates a high level of government support into the deposit ratings of CIMB Niaga, Panin, BDI, and Permata, given their sizable market shares of system deposits and relative systemic importance.

For CIMB Niaga and BDI, the banks’ ratings do not receive an uplift, because their adjusted BCAs of baa2 are already at the same level as Indonesia’s sovereign rating of Baa2. For Panin and Permata, the support assumptions result in a one-notch uplift in the banks’ deposit ratings from their respective adjusted BCAs.

WHAT COULD CHANGE THE RATING UP

For Mandiri and BNI, the deposit ratings are already at the level of the sovereign rating of Baa2 with a stable outlook. As such, Moody’s could upgrade the banks’ ratings, if Moody’s upgrades Indonesia’s sovereign rating.

And, Moody’s could upgrade the banks’ BCAs if the banks demonstrate an improvement in their asset quality, supported by continued strength in their loss-absorbing buffers, including loan-loss reserves and core capital.

For BRI and Bank Central Asia, their deposit ratings and BCA are already at the level of the sovereign rating of Baa2 with a stable outlook. As such, Moody’s could upgrade the banks’ ratings and BCAs if Moody’s upgrades the sovereign rating, and their credit fundamentals remain robust and reflect stabilizing asset quality and strong capitalization.

For BTN, CIMB Niaga and BDI, their deposit ratings are already at the level of the sovereign rating of Baa2 with a stable outlook. As such, Moody’s could upgrade their ratings if Moody’s upgrades the sovereign rating.

And, Moody’s could upgrade the bank’s BCAs if they demonstrate an improvement in their asset quality, loss-absorbing buffers — including loan-loss reserves and core capital — as well as a sustained improvement in funding, as reflected by track records of lower deposit funding costs.

For Panin and Permata, Moody’s could upgrade the banks’ deposit ratings and BCAs, if they demonstrate improvements in their asset quality, loss-absorbing buffers — including loan-loss reserves and core capital — as well as improvements in funding.

WHAT COULD CHANGE THE RATING DOWN

For BRI, Mandiri, Bank Central Asia, BNI, BTN, Moody’s could downgrade the banks’ Baa2 deposit ratings if Moody’s downgrades the sovereign rating. For CIMB Niaga and BDI, Moody’s could downgrade the banks’ Baa2 deposit ratings if Moody’s downgrades the sovereign rating and the banks’ adjusted BCAs.

And, Moody’s could downgrade these banks’ BCAs, if their financial fundamentals deteriorate significantly. If all other rating factors are constant, their BCAs would come under adverse pressure if they report a continued increase in problem loans — including nonperforming and restructured loans — or a material decline in core capital ratios and/or
profitability.

For Panin and Permata, Moody’s could downgrade the banks’ deposit ratings and BCAs if their financial fundamentals deteriorate significantly. If all other rating factors are constant, their BCAs would come under adverse pressure, if they report a continued increase in problem loans — including nonperforming and restructured loans — or a material decline in
core capital ratios and/or profitability.

Email: linda.silaen@theinsiderstories.com