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 Long-Term 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 Underpins Ratings: BNI's Long-Term Issuer Default Ratings (IDRs) and National Ratings are driven by Fitch's assessment of high likelihood of extraordinary support coming from government of Indonesia, as reflected in the bank's Government Support Rating (GSR). Fitch believes that the Indonesian sovereign (BBB/Stable) has a high ability and propensity to support the domestic systemically important banks in Indonesia, including BNI.

Improving Operating Environment Outlook: Fitch has revised the outlook on Indonesia's operating environment (OE) score of 'bb+' to positive, from stable. The positive outlook reflects our view of an improving OE for the Indonesian banking sector in the next 12-24 months. This will be driven by steady GDP growth in 2024 and 2025 and continued structural improvements, which should provide an environment for banks to generate satisfactory level of business volumes at an acceptable risk.

The OE score of 'bb+' with positive outlook is above the implied 'b' category score; we use the sovereign rating as a positive adjustment to reflect greater market and economic stability than captured by the implied score. The OE score could be raised in the event of a continuation of declining restructured loan balances along with stable or improving asset quality after the regulatory forbearance measures are decreased or lifted, in Fitch's view.

Significant Market Share: BNI is the fourth-largest bank in Indonesia, holding around 9% of the banking sector assets at end-6M23. Its loan book is dominated by the corporate and commercial segment, which in total accounts for 67% of total consolidated loans. The bank also holds a large share of mortgages in the portfolio, which makes BNI among the top-three largest mortgage lenders in Indonesia.

Targeting Segments with Lower Risk: We believe BNI's underwriting standards are generally better than most of its domestic peers. Loan growth has mostly tracked industry growth in the past years but has come from lower-risk and hence lower-yielding segments, such as private corporates and their related supply chains, and personal loans.

NPL to Decline Steadily: We have revised the outlook on BNI's asset-quality score of 'bb' to positive, from stable, reflecting our view that the score could be raised concurrently with the OE score. We expect BNI's asset quality, as depicted in the nonperforming loans (NPL) ratio, to decline steadily in the next couple of years, on continued loan growth acceleration and loan write-offs. BNI's NPL ratio has remained on a downward trend, with 2.5% at end-6M23 compared with 2.8% in 2022 and 3.7% in 2021.

Steady Improvement in Profitability: Fitch has revised the outlook on BNI's earnings and profitability score of 'bb' to positive, from stable. We expect BNI to maintain a steady improvement in profitability, which is reflected in the operating profit/risk-weighted assets (RWA) ratio. We see that the improvement in asset-quality metrics in prior periods to result in declining credit costs and improving asset yields. The positive outlook reflects that the score could be raised in the event the OE score is raised.

Capitalisation Weaker than Peers: BNI's common equity Tier 1 (CET1) ratio of 19.4% at end-6M23 is likely to remain weaker than the peer average of around 24%, as we expect BNI to maintain a high dividend payout ratio in the medium term and to continue providing capital injections to subsidiaries. We have maintained BNI's capitalisation and leverage score at 'bb+' but revised the outlook to stable, from negative. The change in outlook reflects that the headroom is likely to be maintained, despite downside risk to the core metric, as the OE improves.

Stable Funding Profile: We project BNI's funding and liquidity profile to remain stable, with the loan/ deposit ratio (LDR) rising slowly on the acceleration in loan growth and tightening system liquidity. BNI's LDR was 85% at end-6M23, up from 84% in 2022 and 80% in 2021, in line with industry movements.

BNI's funding and liquidity score of 'bbb-' is above its implied category score of 'bb', as we continue to apply a positive adjustment for deposit structure to take into consideration the large portion of cheap funding 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 with an unchanged OE score at 'bb+'.

This would most likely depend on a larger deterioration in restructured loans to NPLs 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, which is 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 nonperforming, 'special-mention' and restructured loan ratios in line with those of higher-rated peers, its four-year average operating profit/RWA ratio at the higher end of the 1.25% to 4.75% range, and its CET1 ratio above 21%.

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 nonperformance 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 nonperformance risk, as we believe that nonperformance 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 nonperformance 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.

BNI's Long-Term IDR (xgs) is at the level of the VR. The Short-Term IDR (xgs) is mapped to the bank's Long-Term IDR (xgs).

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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 nonperformance risk leading to a widening of notching would also result in a rating downgrade. A reassessment of nonperformance risk would be likely to arise from our belief of reduced support prospects for these instruments, which would most likely result in a change to the anchor rating for these obligations to the bank's VR and a two-notch downgrade of the issue rating.

The bank's Long-Term IDR (xgs) could be downgraded if the VR is downgraded. The Short-Term IDR (xgs) could be downgraded if the VR is downgraded below 'B-'.

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.

The bank's Long-Term IDR (xgs) could be upgraded if the VR is upgraded. The Short-Term IDR (xgs) could be upgraded if the VR is upgraded.

VR ADJUSTMENTS

The OE score of 'bb+' has been assigned above the implied category score of 'b' for the following adjustment reason: sovereign rating (positive).

The funding and liquidity score of 'bbb-' has been assigned above the implied category score of 'bb' for the following adjustment reason: deposit structure (positive).

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 ratings are driven by and linked to Indonesia's sovereign ratings based on our expectation of extraordinary support.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

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