Fitch Ratings has affirmed PT Bank Negara Indonesia (Persero) Tbk's (BNI) 'BBB-' Long-Term Issuer Default Ratings (IDRs) and other international ratings.

At the same time, Fitch Ratings Indonesia has affirmed the bank's 'AA+(idn)' National Long-Term Rating. The Outlook on the IDRs and the National Long-Term Rating is Stable. A full list of rating actions is below.

'AA(idn)' National Long-Term Ratings denote expectations of a very low level of default risk relative to other issuers or obligations in the same country or monetary union. The inherent default risk differs only slightly from that of the country's highest-rated issuers or obligations.

'F1(idn)' National Short-Term Ratings indicate the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Under the agency's National Rating scale, this rating is assigned to the lowest default risk relative to others in the same country. Where the liquidity profile is particularly strong, a '+' is added to the assigned rating.

Key Rating Drivers

Government Support-Driven Ratings: BNI's IDR and National Ratings are driven by our expectation of a high probability of extraordinary government support if needed, as reflected in the bank's Government Support Rating (GSR) at 'bbb-'. Fitch believes that the government of Indonesia has a strong ability and propensity to support Indonesia's domestic systemically important banks (D-SIBs), including BNI.

Stable Operating Environment: Fitch expects a steady economic recovery through to 2024 to support the business prospects of Indonesian banks. Financial profiles have continued to improve, with loan-growth acceleration above our forecast for 2023. We have maintained the 'bb+' operating environment (OE) score for Indonesian banks, above its implied category score of 'b'. We have adjusted the score upwards due to Indonesia's sovereign rating of 'BBB'/Stable, which reflects greater market and macroeconomic stability than is captured in the implied OE score.

Dominant Domestic Franchise: BNI, the fourth-largest bank in Indonesia, had a market share of around 9% of banking sector assets at end-9M22. Its traditional banking business is focused on lending to corporates and the commercial segment. We have revised downwards the business profile score to 'bbb-' from 'bbb', reflecting BNI's structural position versus larger peers. Customers consist of a larger share of second-tier - rather than prime - corporate borrowers compared with some peers, and market share is likely to remain smaller than Indonesia's three largest banks.

Lowering Risk Appetite. We believe BNI's underwriting standards to be better than its local peers, and risk control has improved in the past few years. Loan growth has been in line with the local industry average, but the driver of loans in recent years has been coming from lower-risk segments. Fitch has maintained the bank's risk profile at 'bb+'.

Improving Asset-Quality Metrics. We have maintained BNI's asset-quality score at 'bb', in line with its implied category score. We expect restructured loans to decline further while non-performing loans (NPL) should remain relatively steady through to 2024. The NPL ratio fell to 3.0% by end-9M22, from 3.7% in 2021, but the latest figure remained higher than the peer average of 2.7%.

Stabilising Profitability. Fitch has maintained BNI's earnings and profitability score at 'bb+'. We project average operating profit/risk-weighted assets (RWA) to remain within the mid-range of 1.25%-4.75%, which corresponds to the implied category score of 'bb'. We expect BNI's stabilising profitability to come from lower credit costs and sustained loan growth that is able to partially offset the impact of a narrowing net interest margin (NIM).

Capitalisation on Negative Outlook. Fitch has maintained BNI's capitalisation and leverage score at 'bb+' but have revised the outlook to negative from stable. Our revision takes into consideration the cancellation of BNI's rights issuance plan and its intention to increase the dividend pay-out ratio from 25% to around 30%-40%, thereby creating downward pressure on the bank's current CET1 ratios of 17.0% at end-9M22.

Stable Funding Profile. We expect BNI's funding and liquidity to remain satisfactory, with the loan/deposit ratio (LDR) to increase gradually as industry liquidity declines. We have maintained the funding and liquidity score at 'bbb', above its implied category score of 'bb', as we continue to apply positive adjustment for 'deposit structure' to take into consideration the large portion of current account and savings account (CASA) of total deposits.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of Indonesia's sovereign rating or a perceived weakening of support propensity from the government could lead to a downgrade of BNI's GSR, which would also lead to a downgrade of its IDRs. A downgrade of BNI's National Long-Term Rating would be likely to arise from a weakening in its overall credit profile relative to the national rating universe of Indonesian financial institutions.

A downgrade of the Viability Rating (VR) could stem from significant deterioration in BNI's financial position, but this would only occur amid downward revisions of multiple Key Rating Drivers. This would be likely to depend on larger downgrade of restructured loans to NPL compared with our base case, the bank's four-year average operating profit/RWA ratio falling to below 2.4% on a sustained basis, the CET1 ratio falling - and remaining below - 17%, and a persistent weakening of the bank's funding and liquidity position, likely to be reflected in a significant rise in the proportion of higher-cost funding sources and tight liquidity buffers above minimum requirements.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Indonesia's sovereign rating or our view of an increased propensity of support from the government could lead to an upgrade of BNI's GSR, which would also lead to an upgrade of its Long-Term IDRs. An upgrade of BNI's National Long-Term Rating would be likely to arise from a strengthening in its overall credit profile relative to Indonesia's national rating universe. There is no upside for the bank's National Short-Term Rating, which is already at the highest point on the scale.

An upgrade of the VR would depend on sustained improvements in multiple Key Rating Drivers, for example if its core ratios in asset quality, earnings and profitability, and capitalisation and leverage, were more in line with those of higher-rated peers. This would coincide with the bank maintaining its non-performing, 'special-mention' and restructured loan ratios in line with those of higher-rated peers, its four-year average operating profit/risk-weighted asset ratio at the higher end of the 1.25% to 4.75% range, and its CET1 ratio above 20%.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Subordinated Debt. BNI's Basel III-compliant subordinated bonds are rated two notches below its support-driven Long-Term IDR. The rating on the subordinated bonds is anchored from the IDR, consistent with criteria guidance that recommends notching for loss severity off the IDR in cases where we apply non-performance risk mitigation due to sovereign support. In order for deferral on the notes to be triggered, a bank must fail to meet its minimum capital requirements. Our overall view on support that drives BNI's GSR at 'bbb-' assumes the government will not allow the bank to breach its capital buffers. The sovereign would therefore be providing support for these instruments by extension - as a breach of capital requirements is the only way that coupons on these instruments can be deferred.

Both notches are for loss severity, to reflect their subordination and our view of the bonds' poor recovery prospects compared with senior unsecured obligations. These Tier 2 debt instruments have an embedded permanent write-down feature (both principal and/or interest in full or in part) that can be triggered when the bank approaches its point of non-viability.

There is no additional notching for non-performance risk as we believe that non-performance is neutralised by potential support from the sovereign. This approach is different for banks in Indonesia that do not benefit from parental or sovereign support. For a typical Indonesian bank, Fitch's standard notching for non-performance risk for similar subordinated bonds is one notch, to account for the risk of going-concern losses from the deferral of coupon and/or principal. The bonds incorporate features that allow coupons to be deferred and accumulated if the bank's capital position falls below its minimum requirements.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of BNI's Long-Term IDR would lead to a corresponding downgrade of the bank's issue rating. A reassessment of loss severity or non-performance risk leading to a widening of notching would also result in a downgrade of the rating. A reassessment of non-performance risk would be likely to arise from our belief of reduced support prospects for these instruments, which would likely result in a change to the anchor rating for these obligations to the bank's Viability Rating and a two-notch downgrade of the issue rating.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the issue rating would result from an upgrade of BNI's Long-Term IDR. An upgrade would also be possible in the event that we narrow the notching for loss severity on these instruments from Fitch's base case of two notches, however we believe this is unlikely in the near to medium term.

VR ADJUSTMENTS

The Operating Environment score has been assigned above the implied score due to the following adjustment reason(s): Sovereign Rating (positive).

The Funding & Liquidity score has been assigned above the implied score due to the following adjustment reason(s): Deposit Structure (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

BNI's GSR, IDRs and National Ratings are credit-linked to Indonesia's sovereign ratings based on our expectation of extraordinary support.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.

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