Singapore, November 19, 2012 -- Moody's Investors Service has affirmed the Baa3/Prime-3 long-term/short-term foreign currency deposit ratings of Bank Tabungan Negara (BTN). At the same time, the rating agency has raised the bank's financial strength rating (BFSR), or standalone credit assessment, to D from D-, mapping to a baseline credit assessment (BCA) of ba2 from ba3. All ratings, including the revised rating, carry a stable outlook.
The affirmation of the deposit ratings is based on Moody's continued view that the likelihood of systemic support for BTN in the event of a crisis is very high. This is based on the bank's pro forma 61.35% ownership by the government of Indonesia and its significant policy role of providing housing loans to low and middle income earners.
The upgrade in the BFSR follows the boost in BTN's capital as a result of its IDR1.5 trillion rights issue in November. After the exercise, its pro forma Tier 1 ratio will rise to 17.4% from 14.4% - higher than the 14.1% average of the other Moody's-rated Indonesian banks.
The higher standalone rating also considers the bank's successful efforts to lessen several structural characteristics that arise from its policy function as a bank that focuses on housing loans, with a significant proportion to low income borrowers. Specifically, BTN has relatively weak liquidity compared to other Indonesian banks, with a loan-to-deposit ratio well above 100%. The bank also has a maturity mismatch, with just over a third of its assets in long-dated mortgages but 60% of its deposits in time deposits maturing within a year.
BTN remains the largest mortgage provider in Indonesia, with a 22% share of the overall market and a virtual monopoly over the government mortgage subsidy program. In September 2012, housing loans accounted for 86% of the bank's loan portfolio; of this total, 39% were subsidized mortgages.
As a result of this focus on housing loans, BTN's credit impairment expenses are low compared to other Indonesian banks. Nonetheless, BTN's non-performing loan (NPL) ratio has been marginally above the system, and special mention loans far higher than the system range of 4%-6%. The latter is attributed to the repayment behavior of its mortgage borrowers, which tend to be tardy. The bank is strengthening its collections system to address this.
Its loan growth since 2008 has outpaced the system. Most of this growth was in non-housing loans, which record weaker NPL ratios than housing loans but have higher yields. The shift in lending towards non-housing loans is in line with the bank's strategic direction. It is moving away from providing government subsidized mortgages to granting loans on a commercial basis. Non-housing loans accounted for 14% of loans in September 2012 versus 6% at end-2009. While this shift in strategy has not materially compromised asset quality to date, the growth in this area is a risk factor that will be a key driver of the bank's rating going forward.
From a funding perspective, the bank has a relatively small branch network and has only recently been more aggressive in gathering retail deposits. Therefore, the high loan-to-deposit ratio will gradually trend down.
Furthermore, it aims to reduce maturity mismatch by diversifying and lengthening its funding. Consequently, it is active in the domestic market for securitizations, bond issuances and repurchase agreements.
WHAT COULD DRIVE THE RATINGS DOWN/UP
BTN's ratings could be upgraded if for at least two years: (i) its Tier 1 capital ratio, after incorporating expected losses in its risk assets using Moody's scenario analysis, is in line with levels for ba1 rated Indonesian banks; (ii) its percentage of special mention loans is in line with the system; (iii) the bank's loan-to-deposit ratio stays well below 100% and maturity mismatch decreases; and (iv) its NPL ratios are in line with the system.
Given this action, BTN's ratings are unlikely to be downgraded in the near term although the triggers are: (i) Moody's assessment shows that its Tier 1 capital ratio falls below the range for ba2 rated Indonesian banks after incorporating expected losses in its risk assets using Moody's scenario analysis; (ii) its NPL ratios for non-housing loans deteriorate from September 2012 levels for four quarters: 4.8% for construction loans and 5.5% for commercial loans; and (iii) the sovereign ratings are lowered.
The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
BTN, headquartered in Jakarta, had assets of IDR98.8 trillion as of September 2012. It is the tenth-largest bank in Indonesia by assets.
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Beatrice Woo VP - Senior Credit Officer Financial Institutions Group Moody'sInvestors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Stephen Long MD - Financial Institutions Financial Institutions Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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