S&P Upgrades Indonesian Banks’ Ratings as Confidence Grows

Jakarta Globe, Dion Bisara, March 14, 2010

Bank Mandiri has welcomed S&P’s upgrade of its debt rating, saying it will help lower its borrowing costs. (Antara Photo/Prasetyo Utomo)

After upgrading Indonesia’s sovereign debt on Friday, rating agency Standard & Poor’s lifted the debt ratings of three domestic banks in a further sign of investor confidence in the economy.

S&P raised the ratings on the foreign currency debt of PT Bank Mandiri, PT Bank CIMB Niaga and PT Bank Internasional Indonesia to BB from BB-.

“The ratings on the banks were raised following the similar action on the sovereign credit rating on Indonesia,” said Terry Sham, a credit analyst at S&P, in a statement.

Standard & Poor’s on Friday raised Indonesia’s sovereign debt rating from BB- to BB with a “positive outlook,” meaning the country is now just two notches below S&P’s investment grade.

S&P said Indonesia’s debt could be upgraded again in the near future given the positive outlook.

The banks welcomed the upgrades, saying they would help reduce their funding costs.

“It will be good for Bank Mandiri and other lenders as it will enable us to reduce our cost of funds and make it easier to raise long-term financing, especially through the capital markets,” said Pahala Mansury, Bank Mandiri’s chief financial officer.

Purbaya Yudhi Sadewa, chief economist at the state-run Danareksa Research Institute, said the upgrades were a result of the resilience of the economy during the global financial crisis last year and the good performance of the banking sector.

“I think this is a good sign that could help jack up Indonesia’s banking sector,” Purbaya said. “I think if infrastructure development goes as planned, this could mean Indonesia might obtain investment grade in one or two years. That’s very achievable.”

The rationale behind the rating increase differed slightly for each bank. However, in principal, S&P said it determined that shareholders of these banks would strongly support any corporate actions.

S&P argued that as the government owns 67 percent of Bank Mandiri, it could rely on strong government support.

“Our earlier rating on Bank Mandiri did not incorporate our expectation of extraordinary government support to be available to the bank,” S&P said.

Bank Mandiri is the largest bank in the country by assets. It has a 16.1 percent market share of consumer deposits.

Bank Mandiri plans to issue about $300 million of subordinated debt to help lift the bank’s capital and will ask the government to lower the dividend-payout ratio to below 35 percent, which would increase retained earnings, further boosting its capital base.

The lender is also seeking approval from the government to conduct a rights issue this year to lift its capital-adequacy ratio in support of more lending.

Bank Mandiri’s profit rose 26 percent to Rp 6.72 trillion ($731 million) last year. Net interest income for the period rose 32 percent Rp 15.75 trillion.

“We could further raise the rating on Bank Mandiri if its asset quality and earnings improve and there is a similar rating action on the foreign currency rating on Indonesia. We may lower the rating if the bank’s asset quality deteriorates or the foreign currency sovereign rating on Indonesia is lowered,” S&P added.

S&P applied a similar argument to Bank CIMB Niaga. The agency said it expected the bank to be supported by its Malaysian parent company, the CIMB group. “We expect CIMB Niaga to continue to be strategically important to CIMB. The bank could be upgraded if: the foreign currency rating on Indonesia is raised; and the bank successfully optimizes synergy after the earlier merger and demonstrates improvement in asset quality, while maintaining an adequate profitability,” S&P noted.

S&P also expects that Malayan Banking Berhad (Maybank) will support its subsidiary, PT Bank International Indonesia, as a result of the improved sovereign debt rating. “We expect BII to continue to be strategically important to Maybank,” S&P said.