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Rating Action:

Moody's affirms Bank Tabungan Negara's ratings, assigns Ba3 (hyb) to Tier 2 capital securities

10 Jan 2020

Singapore, January 10, 2020 -- Moody's Investors Service has today affirmed the Baa2 long-term local and foreign currency deposit ratings of Bank Tabungan Negara (P.T.) (BTN).

Moody's has also affirmed the bank's Baseline Credit Assessment (BCA) and Adjusted BCA of ba1.

At the same time, Moody's has assigned a Ba3 (hyb) subordinate rating to the bank's proposed USD-denominated Tier 2 capital securities, with the rating subject to Moody's review of the final documents.

The outlook on the ratings, where applicable, is maintained at stable.

A full list of the ratings is provided at the end of this press release.

RATINGS RATIONALE

RATING AFFRIMATION

BTN's Baa2 long-term local and foreign currency deposit ratings are two notches higher than the bank's ba1 BCA, because Moody's incorporates two notches of uplift reflecting Moody's assessment of a very high probability of support from the Government of Indonesia (Baa2 stable), in times of need.

The support assumption is predicated on: (1) the government's 60% ownership of BTN; (2) the bank's policy role in supporting the government's home ownership program; and (3) the bank's systemic importance as one of the largest banks in Indonesia by deposits.

The affirmation of BTN's BCA reflects the bank's market position as the largest housing lender with a market share of 40% as of 30 September 2019, with a near monopoly in the subsidized mortgage market. The bank also receives funding support from government-related entities, in addition to the Government of Indonesia.

The BCA also incorporates Moody's expectation that BTN's asset quality will remain under pressure, while its profitability and capitalization will modestly recover over the next 12-18 months.

BTN's nonperforming loan ratio increased to 3.5% at 30 September 2019 from 3.2% a year ago. An elevated level of restructured loans further increases the bank's asset risk.

Moody's expects BTN's asset quality to remain under pressure over the next 12-18 months, as a result of its aggressive loan expansion activities since 2015 per the government's housing program.

In addition, the slowing domestic economy will weigh on the debt servicing ability of the bank's borrowers, especially given its concentration in low and middle-income segments and exposure to small and mid-sized developers.

Nevertheless, Moody's expects BTN's profitability will modestly improve over the next 12-18 months, as its credit costs will normalize when the bank's loan-loss buffer increases as a result of the implementation of Pernyataan Standar Akuntansi Keuangan (PSAK) 71 in January 2020 - the equivalent of International Financial Reporting Standards 9. The bank's funding costs will also decline following the central bank's cuts in reserve requirements and policy rate, as well as following easing liquidity conditions.

Moody's also anticipates a steady recovery in BTN's capitalization and a modest loan growth rate of around 6% for 2020. Nevertheless, the bank's Common Equity Tier 1 ratio will be reduced by more than 300 basis points when PSAK 71 is implemented, according to the bank's management.

Moody's does not have any particular governance concerns for BTN, and therefore does not apply any corporate behavior adjustment to its BCA. Moody's views the bank's risk management commensurate with its risk appetite.

PROPOSED TIER 2 CAPITAL SECURITIES

The Ba3 (hyb) rating assigned to BTN's proposed Tier 2 capital securities is two notches below BTN's ba1 Adjusted BCA, in line with Moody's notching guidance for contractual non-viability subordinated debt.

The Ba3 (hyb) rating reflects: (1) the subordination of these securities in liquidation; and (2) the potential uncertainty regarding the timing of the write down, as these securities may be forced to absorb losses near (but before) the point of non-viability, as a way to avoid a bank-wide resolution.

Moody's does not include any additional notching for the coupon-skip mechanism embedded in these securities. This is because the bank will likely be close to the point of non-viability when the mechanism is triggered, with low incremental losses due to skipped coupons.

As these Tier 2 capital securities are intended to provide loss absorption, the Ba3 (hyb) rating does not benefit from any uplift due to government support.

Under the draft terms of the bank's Tier 2 capital securities, these securities constitute direct, unsecured and subordinated obligations of the bank, and rank pari passu with all other subordinated debt classified as Tier 2 capital.

In addition, the principal and interest - including arrears of interest - of these securities will be partially or fully written down in the event that: (1) the bank's Common Equity Tier 1 ratio breaches 5.125%; (2) the government plans to rescue the bank by injecting capital; or (3) the regulator exercises discretion based on other circumstances.

Interest payments are also required to be deferred on a cumulative basis if the bank is unlikely to meet the regulatory capital requirements. The deferral of interest payment does not constitute an event of default.

WHAT COULD CHANGE THE RATING UP/DOWN

BTN's long-term deposit ratings are at the same level as Indonesia's sovereign rating. Given the stable outlook on the sovereign rating, an upgrade of the bank's deposit ratings is unlikely.

Nevertheless, Moody's could upgrade the bank's BCA and subordinate rating if there is a sustained improvement in the bank's asset quality, particularly in its non-subsidized mortgages and construction loans. Higher profitability supported by stronger access to low-cost deposits could also exert upward pressure on the bank's BCA and subordinate rating.

A downgrade of the sovereign rating would lead to a downgrade of BTN's long-term deposit ratings.

In addition, Moody's could downgrade the bank's BCA and subordinate rating if the bank's asset quality deteriorates further, particularly in its non-subsidized mortgages and construction loans. A further decline in its capitalization could also exert downward pressure on the BCA and subordinate rating.

LIST OF RATINGS

- Long-term local and foreign currency deposit ratings affirmed at Baa2; outlook maintained at stable

- Long-term foreign currency subordinate rating assigned Ba3 (hyb)

- Long-term local and foreign counterparty risk ratings affirmed at Baa2

- Long-term counterparty risk assessment affirmed at Baa2(cr)

- Short-term local and foreign currency deposit ratings affirmed at P-2

- Short-term local and foreign currency counterparty risk ratings affirmed at P-2

- Short-term counterparty risk assessment affirmed at P-2(cr)

- BCA and Adjusted BCA affirmed at ba1

- Outlook maintained at stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Jakarta, Bank Tabungan Negara (P.T.) reported total assets of IDR316.2 trillion ($22.3 billion) at 30 September 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Tengfu Li
Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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