JAKARTA (TheInsiderStories) – Moody’s Investors Service has upgraded the long-term local and foreign currency deposit ratings of PT Bank Permata Tbk (IDX: BNLI) to Baa2 from Baa3. The agency has also upgraded the lender’ Adjusted Baseline Credit Assessment (BCA) to baa2 from ba1.
The outlook has been changed to stable from ratings under review. Today’ rating action concludes the review for upgrade initiated on Dec 18, 2019.
The upgrade of Bank Permata‘ long-term deposit ratings after Bangkok Bank Public Co.Ltd., (Baa1 stable, baa1) completed its acquisition of a 89.12 percent stake of the bank on May 20. The lender is Bangkok Bank’ most significant overseas investment to date and will account for around 10 percent of the latter’ total loans.
More importantly, Bank Permata will represent a critical part of the new parent’ long-term strategy to diversify outside of Thailand and capture business opportunities in the growing intra-Southeast Asia trade space.
At the same time, Moody’s has downgraded the level of support that the local bank will receive from the government of Indonesia (Baa2 stable) to moderate from high, taking into consideration Bank Permata‘ modest deposit market share, as well as its assessment that the authorities will be less forthcoming in providing support in times of need because they will expect Bangkok Bank to do so.
The rapid and widening spread of the COVID-19, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The banking industry in Indonesia has been one of the sectors affected by the shock, given the widespread decline in business revenues that has hurt borrowers’ debt-servicing ability.
Moody’s expects Bank Permata‘ asset quality to come under significant pressure, particularly in the bank’s small and medium enterprise and mid-sized corporate segments. While loan restructuring will provide temporary relief, Moody’s anticipates that nonperforming loans will nevertheless increase given the magnitude of economic disruptions.
Profitability will also decline sharply, dragged down by increases in credit costs and a compression in net interest margin. Credit costs as a percentage of average gross loans have already risen to 2.3 percent as of March 31, 2020 from 0.4 percent a year earlier.
However, Bank Permata‘ strong capital and loan-loss coverage will provide ample buffers to absorb potential losses. Moreover, they will enable the bank to grow its loan book and restore its profitability when the crisis eventually passes. As of 31 March 2020, the lender’ common equity tier 1 and loan-loss coverage ratios stood at 18.7 percent and 152.3 percent, respectively.
The bank also maintains strong liquidity, with its liquidity coverage ratio at 236.3 percent and net stable funding ratio standing 120.8 percent as of March 31, 2020, which are well above the regulatory requirements. Its long-term deposit ratings are already at the same level as Indonesia’ sovereign rating.
Given the stable outlook on the sovereign rating, an upgrade of the bank’ ratings is unlikely. Nevertheless, Moody’s could upgrade Bank Permata‘ BCA if there is a significant improvement in its asset quality, which could also lead to higher profitability.
A downgrade of Indonesia’ sovereign rating could lead to a downgrade of Bank Permata’s ratings. A downgrade of Bangkok Bank’ BCA could also lead to a downgrade the lender Adjusted BCA and ratings.
Bank Permata‘ BCA and ratings could also be downgraded if there is a substantial decline in capital. A further deterioration in asset quality or profitability could also exert downward pressure on the BCA and ratings.
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