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Rating Action:

Moody's revises Bank Negara Indonesia's BFSR outlook to positive

21 Jul 2010

Foreign currency long-term deposit rating of Ba3 with positive outlook unaffected

Singapore, July 21, 2010 -- Moody's Investors Service has revised the outlook for Bank Negara Indonesia's (BNI) D- bank financial strength rating (BFSR) to positive from stable.

The BFSR maps to a baseline credit assessment of Ba3.

All other ratings are unaffected, and carry stable outlooks, unless indicated: foreign currency long-term deposit of Ba3 with a positive outlook, foreign currency short-term deposit of Not Prime and global local currency (GLC) deposit of Baa3.

"The rating action anticipates that the positive trajectory of changes in BNI over the past two years will continue, thereby strengthening and raising the bank's risk profile into a higher BFSR band. However, a longer track record of improved and sustainable performance will have to be established to warrant any BFSR upgrade," says Beatrice Woo, a Moody's Vice President and Senior Credit Officer.

In 2008, the Indonesian government -- BNI's major shareholder with a 76.36% stake -- made sweeping changes to management and the boards of directors and commissioners in an apparent bid to transform and prepare BNI for its next phase.

Prior to this, the bank had suffered from relatively weak asset quality, average profitability, erratic earnings trend and poor capitalization. In addition, its operations were over-shadowed by apparent weaknesses in its standards of corporate governance and internal controls.

For example, the bank was involved in a huge letters of credit fraud case in 2003 and generally faced a high level of non-performing loans (NPL). Despite internal restructuring since the 1997 Asian financial crisis, the extent and implementation of these reforms, including in the areas of credit controls and processes, appeared ineffective.

The current team has been mandated to optimize the bank's infrastructure and resources. Specifically, management aims to raise profitability, improve asset quality and increase efficiency.

Thus far, the results for 2008 and 2009 have shown signs of a turnaround: its NPL ratio declined to 4.6% at March 2010 from 8.5% at end-2007; its net interest margin of 5.8% in 1Q10 was generally wider than earlier levels; and there is more dependence on interest income from lending, rather than passive income from government bonds and marketable securities.

Meanwhile, the bank will address its comparatively low capital levels through a rights issue of IDR4-7 trillion in the last quarter of the year.

Nonetheless, BNI's entrenched corporate culture and legacy banking practices make transforming the bank challenging. Therefore, its current financial metrics need to be sustained for a longer period and upward rating action is unlikely in the near term.

In terms of strategy, BNI enjoys the largest overseas branch network among Moody's-rated Indonesian banks. This is one of its key franchise strengths.

Furthermore, it enjoys long-established credit relationships with many large corporates and intends to increase its presence in the retail sector. A large domestic branch network and strong brand name support its efforts to expand in retail banking.

However, this move is also challenging as it takes BNI away from its traditional large corporate lending activities, while competition in retail banking has intensified.

The last rating action on BNI was taken on June 21, 2010 when the outlook on its Ba3 foreign currency long-term deposit rating was revised to positive from stable. The action was in line with similar actions taken on Indonesia's sovereign ratings on June 21, 2010.

The principal methodologies used in rating these banks were "Bank Financial Strength Ratings: Global Methodology," February 2007 and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology," March 2007, which can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

BNI is headquartered in Jakarta and had assets of IDR215.7 trillion at March 2010. It is the fourth largest bank in the country with a 9.0% share of system deposits.

The detailed ratings are shown below and carry stable outlooks except where indicated:

GLC deposit of Baa3, foreign currency long-term deposit rating of Ba3 with a positive outlook, foreign currency short-term deposit of Not Prime and BFSR of D- with a positive outlook.

Singapore
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Singapore
John Moh Kan Tham
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's revises Bank Negara Indonesia's BFSR outlook to positive
No Related Data.
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