JAKARTA (TheInsiderStories)Moody’s Investors Service has assigned first-time Baa2 local and foreign currency issuer ratings to Adira Dinamika Multi Finance Tbk (Adira). The issuer outlook is stable, said Moody’s senior analyst last week.

Moody’s assumes that Baa2 ranks three levels higher than Ba2 Adira’s independent credit profile, because of the high possibility that Adira will receive support from its direct parent, Bank Danamon Indonesia Tbk (BDI, stable Baa2, baa3) and majority shareholder, MUFG Bank , Ltd. (A1 stable, a3) when needed.

Ba2 Adira’s independent credit profile considers companies: (1) established domestic franchises and diverse operations that support business growth, (2) strong capital and profitability, and (3) weak liquidity, due to a large dependence on wholesale funding.

Moody’s assessment of Adira’s asset quality is a factor in the volatility inherent in asset quality for motorcycle financing in Indonesia, usually related to changes in inflation and economic conditions. In September 2018, Adira has total assets of US$ 2.2 billion (Rp 30.7 trillion).

Moody’s hoped that Adira’s asset quality will remain stable for the next 12-18 months, supported by a stable operating environment in Indonesia.

Profitability is the company’s main strength, with asset returns averaging 4.9 percent over the past three years, driven by high net interest margins (NIM).

Adira’s NIM rose to 14.5 percent on September 30, 2018 from 10.6 percent in 2016, and benefited from strong growth in the motorcycle segment which produced higher and second hand segments. High returns help compensate for high operating costs and credit costs.

As we know, Adira is the third largest car and motorcycle financing company in Indonesia based on assets, and has a variety of business portfolios that finance various automotive brands as well as new and used vehicles.

In addition, the company benefited from joint financing arrangements with BDI, which enabled it to increase the BDI balance sheet for business growth. The quality metrics of company assets are superior to the industry average in Indonesia.

The company reported a gross nonperforming loan (NPL) ratio of 1.6 percent -1.9 percent over the past three years compared to 3.0 percent -3.5 percent for the system during the same period.

His long-standing presence in the industry has helped him build a large customer database to support his credit guarantee.

Credit costs rose to 41 percent of pre-provision income at the end of 2017 from 33 percent at the end of 2013 because the company increased exposure to the used vehicle segment.

Strong profitability results in a strong generation of internal capital and a strong capital ratio. The real equity ratio is 20.6 per cent on 30 September 2018. Rather offsetting this power is funding and weak company liquidity.

So far, Adira is entirely dependent on wholesale sources for its funding needs, similar to industry partners, and has limited assets that can be mobilized to overcome the problem of refinancing.

However, some risks are the basis of large wholesale funding and good access to land and offshore liquidity.

So far, the rating of Adira Baa2 publishers includes a very high level of support from its parent bank, BDI, following the following considerations: 92 percent of BDI shares in Adira, strategic close proximity to the current vehicle financing franchise with BDI business operations, and the growing importance of Adira for business growth and BDI profitability.

At the same time, the rating also included Moody’s expectations that would benefit from BDI’s majority shareholder, MUFG Bank, Ltd. to increase its ownership in BDI to around 74 percent from the current 40 percent.

Reportedly that previously Baa2 Adira’s ranking was at the same level as adjusted base credit, BDI, but was driven by Moody’s probability of affiliate support. Assuming that Adira’s standard credit profile is important for BDI, the Adira rating can be increased and when the BCA adjusted from BDI is increased.

In contrast, the Baa2 Adira rating can be downgraded if the BCA adjusted BDI is downgraded or the company’s standard credit profile deteriorates.

A significant increase in the level of the Adira NPL and a decrease in material in its absorbent loss buffer can suppress the company’s independent credit profile.

Written by Daniel Deha, Email: daniel@theinsiderstories.com