Fitch Ratings has affirmed PT Bank Central Asia Tbk's (BCA) Long-Term Issuer Default Rating (IDR) at 'BBB-'.

At the same time, Fitch Ratings Indonesia has affirmed BCA's National Long-Term Rating at 'AA+(idn)'. The Outlooks are Stable.

Fitch has also upgraded BCA's Government Support Rating (GSR) to 'bbb-' from 'bb+' following a reassessment of the likelihood of the Indonesian government providing support to its domestic systemically important banks (D-SIBs). A full list of rating actions follows below.

'AA' National Long-term Ratings denote expectations of a very low level of default risk relative to other issuers or obligations in the same country or monetary union. The default risk inherent differs only slightly from that of the country's highest rated issuers or obligations.

'F1' National Short-term Ratings indicate the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Under the agency's national Rating scale, this rating is assigned to the lowest default risk relative to others in the same country. Where the liquidity profile is particularly strong, a '+' is added to the assigned rating.

Key Rating Drivers

Ratings Underpinned by Government Support: BCA's Long-Term IDR is at the same level as its Viability Rating (VR) and GSR, reflecting Fitch's view that BCA's overall credit profile is buttressed by sovereign support as well as its standalone credit profile. As such, we expect BCA's IDRs and National Ratings to remain stable in the near term, with adequate headroom at its current rating levels.

Stable Operating Environment Outlook: Fitch expects that the operating environment (OE) for Indonesian banks to be stable in the near future, on likely resilient GDP growth in 2023 and 2024, which should support the industry's loan demand and asset quality. We have maintained the OE score at 'bb+' with a stable outlook. The OE score is higher than the implied score in the 'b' category due to a positive adjustment for Indonesia's sovereign rating (BBB/Stable), reflecting greater market and macroeconomic stability than the core metrics could imply.

Leading Transaction-Banking Franchise: BCA is Indonesia's largest private commercial bank and the third-largest overall, with an asset-based market share of around 12% as of June 2022. Its satisfactory business profile is underpinned by its market-leading domestic franchise in transaction banking, which helps BCA to establish a strong funding franchise and generate a high proportion of fee-related income. Its business profile score is assessed at 'bbb', in line with the implied score under Fitch's criteria.

Adequate Asset Quality: BCA reported a decline in bank-only non-performing loan (NPL) ratio to 2.2% in 9M22 from 2.4% in 9M21, with the loan-at-risk ratio dropping to 11.7% from 17.1%. Fitch expects BCA's asset quality to be resilient amid healthy GDP growth and its strong coverage of impaired loans by loss allowance, which underpin our asset quality score of 'bb+' with a stable outlook.

Sustained Profitability Recovery: We expect BCA's profitability to benefit from higher loan growth and lower credit costs due to an overall improvement in asset quality and adequate loss allowance. We also believe that BCA would be one of the banks least negatively affected by rising interest rates as its strong funding franchise will cushion pressure on its net interest margin. BCA's earnings and profitability score is maintained at 'bbb-', in line with the implied score, with a stable outlook.

Satisfactory Capital Buffer: BCA's common equity Tier 1 (CET1) ratio declined only slightly to 25.5% in 9M22 from 25.9% in December 2021 despite high loan growth of 7.1% in 9M22 and a high dividend payout ratio of 57%. We believe the current CET1 ratio provides the bank with a satisfactory buffer against potential asset-quality deterioration. We have maintained BCA's capitalisation and leverage score at 'bbb' with a stable outlook.

Stable Funding Profile: BCA's leading domestic deposit franchise is reflected in its high 81% share of low-cost current and savings deposits in its total deposits as of September 2022, which results in low funding costs and, ultimately, a funding and liquidity score of 'bbb-', above the implied 'bb' category score. Its strong balance sheet is evident in its low loan-to-customer deposit ratio (LDR) of 66.5%, well below the industry's 81%. Our stable outlook on the score reflects our belief that BCA's funding profile will be resilient even amid monetary tightening.

Systemic Importance Drives GSR: The upgrade of BCA's GSR to 'bbb-' from 'bb+' followed our reassessment of government support for Indonesia's typical D-SIBs. BCA is officially designated as a D-SIB with top bucket capital surcharge of 2.5% along with two other large state-owned banks. Our GSR assessment also considers the Indonesian sovereign's ability, reflected in the sovereign rating, and propensity to support its D-SIBs.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

BCA's IDRs could be downgraded following a downgrade of its VR if it happens in conjunction with a simultaneous downgrade of its GSR. However, we believe this to be unlikely in the near future.

BCA's VR could be downgraded if its financial profile deteriorated materially, which could result from a simultaneous and/or multi-notch downgrade in its key rating drivers. This would most likely happen if we lower the OE score for Indonesia's banks given its constraint on other VR factor scores, but we do not believe this is likely to happen in the next 12-24 months. The VR may also be downgraded if BCA's loan quality deteriorates materially, such that the NPL ratio rises to, and is sustained above, 5%, which should result in a higher credit costs and lead to lower scores on both asset quality and earnings and profitability.

BCA's GSR could be downgraded if we believe that the government's propensity to support the bank has weakened. This would most likely happen if BCA's systemic importance declined considerably, which could happen if BCA consistently loses market share, such that its share of system assets dropped to below 8%, coupled with the loss of its transaction banking leadership in Indonesia. BCA's GSR could also be downgraded if we believe the sovereign's ability to support its D-SIBs weakens significantly, which may occur if the government's financial flexibility deteriorated sharply. Fitch perceives these to be unlikely in the near to medium term.

BCA's National Long-Term Rating could be downgraded if BCA's credit profile relative to other rated issuers in Indonesia's national rating universe deteriorates, which could happen if its Long-Term IDR is downgraded. BCA's National Short-Term Rating could be downgraded if the Long-Term IDR is downgraded by three notches or more.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upward revision of the OE score will likely result in an upgrade of BCA's VR, Long-Term IDR and National Long-Term Rating. An upgrade of the VR without an upgrade of the OE score appears unlikely.

BCA's GSR may be upgraded if we believe that that there is a higher government ability and propensity to support Indonesia's D-SIBs. This could arise from a marked improvement in the government's financial flexibility, or a decline in the proportion of assets owned by banks, which may rely on the government for support in times of stress.

There is no upside for BCA's National Short-Term Rating as it is already at the highest point on the national rating scale.

VR ADJUSTMENTS

The OE score of 'bb+' has been assigned above the 'b' category implied score on the following adjustment reason: sovereign rating (positive)

The funding and liquidity score of 'bbb-' has been assigned above the 'bb' category implied score on the following adjustment reason: deposit structure (positive).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

BCA's GSR is driven by Indonesia sovereign ratings based on our expectation of extraordinary support.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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