PT Bank Rakyat Indonesia Outlook Revised To Positive On Resilient Asset #BB+/B# Ratings Affirmed

Stocks and Financial Services Press Releases Friday November 17, 2017 18:17
SINGAPORE--17 Nov--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Nov. 17, 2017--S&P Global Ratings today revised its outlook on PT Bank Rakyat Indonesia (Persero) Tbk. (BRI) to positive from stable. At the same time, we affirmed our 'BB+' long-term and 'B' short-term issuer credit ratings on the Indonesian bank. We also affirmed our 'BB+' issue rating on the bank's senior unsecured notes.

We revised the outlook because we expect BRI's asset quality to remain better than industry average over the next 12-18 months. We expect BRI's credit costs to gradually decline over the next few quarters as the bank has built sufficient buffers against stressed loans (nonperforming loans [NPLs] and performing restructured loans). As of Sept. 30, 2017, BRI has a coverage ratio of about 200% against NPLs.

BRI's performance has been superior to its peers' in the current cyclical downturn in Indonesia. The bank's NPL ratio of 2.2% as of Sept. 30, 2017, was lower than the industry average of 3.0%. The bank's NPLs have consistently been below the industry average over the past six years. BRI's stressed loans at about 7% of gross loans as of Sept. 30, 2017, were also lower than about 9% for both PT Bank Mandiri (Persero) Tbk. and PT Bank Negara Indonesia (Persero) Tbk. (BNI).

BRI's sizable exposure to micro loans at 34.5% of the loan portfolio underpins its above-average asset quality, in our view. The bank's micro loans portfolio is quite granular with low average ticket size and has good geographical spread. This mitigates the risk of a sharp rise in delinquency. BRI's strong understanding of the micro markets, extensive reach in rural areas, and rigorous monitoring and collection mechanisms have helped it maintain low NPLs in this segment despite the low incomes of this borrower profile. Micro loans disbursed under the government's schemes (KUR) are insured for at least 70% of credit losses, benefiting credit costs. Those not under the government's scheme, are secured by collateral. Moreover, about 30% of micro loans are to fixed income earners.

The Indonesian banking system's NPLs have been rising since 2014 due to weak commodity prices and a sluggish domestic economy. Small and midsize enterprises (SMEs) were the most affected as they typically have a single revenue stream, which makes them vulnerable to cyclical downturns. Although the stressed loans in BRI's SME portfolio (24% of total loans) increased, the bank's NPLs in this segment appear to have peaked and declined in the second and third quarters of 2017. We believe management's efforts to control slippages in the SME segment and tighten underwriting practices will enable BRI to sustain its above-average asset quality.

Although BRI's credit costs have risen over the past few years (2.4% of average loans annualized as of Sept. 30, 2017), they remain comparable to regional peers on a five-year average basis at 1%. Moreover, the bank has been building up its loan loss provisions over the past few years, resulting in adequate buffers against downside risks. We also note that the bank has conservatively made 100% provisions against certain stressed loans.

BRI's net charge-offs of 0.6% (annualized) of average loans as of Sept. 30, 2017, are lower than both Bank Mandiri and BNI, which have had higher write offs in past few quarters. This is despite BRI's policy of writing off any micro loan overdue for more than 270 days. BRI plans to increase the proportion of micro loans to 40% of its loan book by 2022 with corporate loans declining to 20% (25.3% as of Sept. 30, 2017). We believe this growth strategy can benefit the banks risk position and its earnings, given micro loans have higher yields and lower NPLs.

High net interest margins (NIMs), lower credit costs, and stable operating expenses should result in good capital generation for BRI. We estimate that the bank's risk-adjusted capital (RAC) ratio will be 9.5%-9.7% over the next 12-18 months. The ratio increased to 9.9% in 2016, from 8.4% in 2015, because of a substantial increase in capital post fixed asset revaluation. We believe the dividend payout ratio will be 40%-45% in 2017 and 2018, compared with 40% in 2016, given the high tier-1 ratio of 21% as of Sept. 30, 2017.

BRI's NIMs (above 8%) should moderate, given several policy rate cuts recently. That said, the cuts will directly affect 65% of the bank's portfolio as micro loans are fixed-rate. NIMs could also decline if the government caps the KUR lending rate at 7% (9% for 2017) without increasing the subsidy. Nonetheless, we expect BRI's NIMs to remain among the highest in the region. We anticipate that the bank's profitability, measured by the ratio of core earnings to average assets, will remain healthy at 2.5%-3.0% over the next 12-18 months.

We expect the bank to maintain its strong market position and its solid funding and liquidity profile.
The positive outlook reflects our expectation that BRI will maintain its above-average asset quality.

We could raise the ratings on BRI in the next 12-18 months if the bank's asset quality remains superior to the industry's and credit costs show a sustainable decline. We could also raise the rating if the bank's RAC ratio remains above 10% on a sustained basis. However, we see a lower likelihood of such an improvement in the RAC ratio as the bank may use up the capital to pay higher dividends and grow its loan book.

We could revise the outlook to stable if BRI's asset quality deteriorates such that its stressed loans increase beyond 10% and credit costs increase to 2.5%-3% on a sustained basis.

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