MOODY'S ASSIGNS RATINGS TO SIX INDONESIAN STATE BANKS
Hong Kong, 01-19-96 -- Moody's Investors Service assigned senior long-term foreign currency bond ratings of Baa3, as well as Ba1 ratings to the long-term foreign currency deposit obligations of six Indonesian state banks. Short-term foreign currency obligations were rated Not Prime. Moody's also assigned Bank Financial Strength Ratings (BFSR) ranging from D+ to E to the six banks.
The six banks to which ratings were assigned are: P.T. Bank Bumi Daya, P.T. Bank Dagang Negara, P.T. Bank Ekspor Import Indonesia, P.T. Bank Negara Indonesia, P.T. Bank Rakyat Indonesia, and P.T. Bank Tabungan Negara.
The Republic of Indonesia's foreign currency bonds and notes are rated Baa3; long-term bank deposits are rated Ba1; and short-term obligations are rated Not Prime. Moody's said that the difference between the senior debt and long-term deposit ratings reflects the great likelihood that deposits would be rescheduled in a stress scenario.
Moody's said that the debt ratings of Baa3 and deposit ratings of Ba1/ Not Prime are supported by the banks' ownership and protective regulatory environment. The six banks are 100% owned by the Republic of Indonesia, through the Ministry of Finance. As of July, 1995, these banks accounted for approximately 40% of the system's assets and loans. Since 1992, all have had the legal status of a PT Persero, defined as a legal entity of a limited liability company wherein the majority of its issued-shares is owned by the Republic of Indonesia. The Republic of Indonesia, as the only shareholder, appoints the management and the Board of Directors of the banks.
Moody's noted that the asset quality of the banks is generally weak, although there are important differences in the portfolio quality of the individual banks. Since 1992, the World Bank has been working closely with Bank Indonesia and the Ministry of Finance to improve the financial fundamentals of the banks. Nevertheless, as a group, the banks are still burdened by significant levels of non-performing assets. Moody's expects it will be several more years before the system has dealt with the current level of problem assets. Moody's noted that the banks possess adequate liquidity because of their nationwide franchise, access to deposits of other public sector entities, and the benefits from their role in distributing funds borrowed by the Republic of Indonesia from the World Bank and other multilateral lending agencies. Furthermore, although Indonesia is not a signatory to the Basle Agreements, the banks meet the BIS risk-based standards. However, capital levels, measured as the cushion available to absorb potential losses in the loan portfolio, is low for several of the banks.
Moody's also said that disclosure for the banks is poor. The banks are audited by the Financial and Development Supervisory Board (BPKP), a government agency which acts as an external auditor to all state-owned companies. Audited financial statements, which are published once a year, are generally not available until the fourth quarter of the following year. The banks do not publish audited interim statements although Bank Indonesia, which regulates and supervises the banks, receives frequent reports from the banks.
Moody's said that Indonesia's Baa3 rating for foreign currency long-term bonds and notes and the Ba1/Not-Prime sovereign ceiling for bank deposits reflects the country's considerable progress over the past 25 years. Steady growth and pragmatic policy-making have led to marked improvements in living standards and to investment/savings rates that are among the highest in the world. The rating also takes in account Indonesia's relatively heavy external debt. While the debt-to-exports rating has been steadily falling, it remains on the high side; the debt service ratio is also high at over 30%. Healthy domestic savings do provide an important cushion, but over the medium-term Indonesia will still depend quite substantially upon foreign capital to fund much-needed investment in infrastructure and higher value-added manufacturing. Under such conditions, policies to foster exports and private sector equity investment to minimize non-productive activities, and to enhance domestic competitiveness, must be maintained. The question of political change and stability must also be addressed. Continued implementation of reform policies will pose a challenge as the country approaches the inevitable transition in leadership. The Baa3 rating also reflects the likelihood that this transition will be manageable and will not reverse the present economic policy agenda.
The following banks were assigned senior debt, long deposit ratings, ratings for short-term obligations and Bank Financial Strength Ratings:
P.T. Bank Bumi Daya (BBD) was assigned a senior debt rating of Baa3, long-term deposit rating of Ba1, a rating of Not Prime for short-term obligations, and a BFSR of E. BBD is currently the largest banks in Indonesia with consolidated assets of approximately $10 billion as of December 31,1994. BBD has a good franchise, with a network of over 200 branches located throughout the Indonesian archipelago. Moody's said that BBD's asset quality, loan loss reserves, and operating efficiency are extremely weak. It is likely that the bank will continue to need capital infusions from its major shareholders for the immediate future.
P.T. Bank Dagang Negara (BDN) was assigned a senior debt rating of Baa3, long-term deposit rating of Ba1, a rating of Not Prime for short-term obligations, and a BFSR of E+. BDN is one of Indonesia's largest banks with consolidated assets of approximately $12 billion as of December 31, 1994. BDN has a good retail franchise. Moody's said that BDN's asset quality, capital levels, and operating efficiency are weak. However, the bank has become more aggressive in charging-off problem loans. Moody's also noted that BDN's overhead is high and the bank has some large single-borrower exposures.
P.T. Bank Ekspor Import Indonesia (Bank Exim) was assigned a senior debt rating of Baa3, long-term deposit rating of Ba1, a rating of Not Prime for short-term obligations, and a BFSR of D. Bank Exim is one of Indonesia's ten largest banks with consolidated assets of approximately $ 9 billion as of December 31, 1994. The bank has an important niche in trade finance and in foreign exchange. Moody's noted that while the bank has traditionally been viewed as one of the better managed Indonesian state banks, the quality of management appears to have declined recently. Asset quality and capital levels are weak. Approximately 40% of the bank's loan portfolio is to government-owned companies.
P.T. Bank Negara Indonesia (BNI) was assigned a senior debt rating of Baa3, a long-term deposit rating of Ba1, a rating for short-term obligations of Not Prime, and a BFSR of D+. BNI is Indonesia's largest bank with consolidated assets of approximately $14 billion as of December 31, 1994. The bank's charter allows its to carry out all aspects of commercial banking, with a particular focus on the development of the industrial sector. BNI's asset quality and capital levels compare favorably to that of its peers. It also has a reputation of being managed professionally. Moody's noted that BNI's major challenge is to balance its need to support government policies and activities while maintaining commercial standards in order to meet the competitive threat from private banks.
P.T. Bank Rakyat Indonesia (BRI) was assigned a senior debt rating of Baa3, a long-term deposit rating of Ba1, a rating for short-term obligations of Not Prime, and a BFSR of E+. BRI is one of Indonesia's largest banks with consolidated assets of $12 billion as of December 31, 1994. BRI provides banking services to cooperatives and non-government organizations. It has approximately one third of the country's savings accounts. In the latter part of the decade of the 1980s, the bank broadened its business profile to include large corporate borrowers. In retrospect, however, this was a mistake because it was a type of lending for which BRI lacked the requisite expertise. Consequently, the asset quality in the corporate segment of the portfolio is considerably weaker than in the other sectors. BRI's current business plan is to focus on the household and micro-business sectors. Moody's also noted that BRI's asset quality and capital levels are weak and profitability is low.
P.T. Bank Tabungan Negara (BTN) was assigned senior debt rating of Baa3, long-term deposit rating of Ba1, ratings for short-term obligations of Not Prime, and a BFSR of D+. BTN is the smallest of the rated Indonesian state banks with consolidated assets of approximately $3.5 billion as of December 31, 1994. Based on the Ministry of Finance's decree of 1974, BTN was appointed the government institution for financing low and middle-income housing. BTN's loan profile is generally characterized by many small loans with modest average outstandings. Asset quality and capital levels are good relative to most of its peers. Moody's noted, however, that the bank is planning to increase the proportion of corporate lending, a segment where the asset quality indices to date, have been weaker than the bank's core residential lending area. Furthermore, BTN recently obtained a license to transact foreign exchange business, which is also a non-core business. Moody's also said that BTN's capital level are likely to decline in the near term as the bank is planning to grow rapidly.
Moody's said that the Indonesian state banks face many challenges. The deregulation of the financial services industry in Indonesia has opened the banks to new competitive forces -- including of Indonesian private banks, whose market share has been growing rapidly over the last five years. The profitability outlook for several banks in the group is poor because the banks are burdened by high overhead expenses and a significant level of non-performing assets. The banks' lending margins are further compressed, in many cases, by a large level of loans which have been restructured. Prospectively, management will be challenged by the need to minimize the degree of political influence in the bank's underwriting decisions while simultaneously strengthening the credit culture in their respective institutions. Moody's recognizes that the banks are collectively investing significantly in training bank personnel at all levels. Moody's also noted that there are qualitative differences in the credit cultures of the various banks. Finally, Moody's added, both the accounting and legal infrastructures of Indonesia are comparatively weak.
Moody's said that it expects to rate other Indonesian banks shortly.
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