Fitch Ratings has revised the Outlook on PT Bank Central Asia Tbk's (BCA) Long-Term Issuer Default Rating (IDR) to Positive from Stable, and affirmed the rating at 'BBB-'.

At the same time, Fitch Ratings Indonesia has revised the Outlook on BCA's National Long-Term Rating Positive from Stable and affirmed the rating at 'AA+(idn)'. A full list of rating actions follows below.

The Outlook revisions are underpinned by change in the outlook on Fitch's Indonesia banking-sector operating environment factor score to positive from stable.

'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

Driven by VR, Sovereign Support: BCA's Long-Term IDR is at the same level as its Viability Rating (VR) and Government Support Rating (GSR), reflecting Fitch's view that BCA's overall credit profile is driven by its standalone credit profile as well as sovereign support. The Positive Outlook on BCA's Long-Term IDR reflects our view that BCA's standalone credit profile is improving in tandem with the operating environment (OE) outlook.

Improving OE: Fitch expects the OE for Indonesian banks to improve in the coming 12 to 24 months, supported by resilient GDP growth in 2024 and 2025 and continued structural improvements, which should create an environment for the banks to generate a satisfactory level of business volumes at acceptable risk levels. The OE score of 'bb+' with a positive outlook is higher than the implied score in the 'b' category due to a positive adjustment for Indonesia's sovereign rating, reflecting greater market and economic stability than the core metrics imply.

The OE score could be raised should we see a continued reduction in restructured loans coupled with stable or improving asset quality in the banking system as the authorities' pandemic-era forbearance measures are reduced or removed.

Leading Transaction-Banking Franchise: BCA's business profile score is one of the highest among Fitch-rated Indonesian banks. 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 2023. 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.

Improving Asset-Quality Outlook: BCA's asset-quality score reflects Fitch's view of its better asset quality compared with a majority of Fitch-rated Indonesian banks, which we expect will continue in light of the improving OE. Its impaired-loan ratio of 1.9% in June 2023 was lower than the system's 2.4%, and we believe BCA's loan loss reserves of 258% of impaired loans are adequate. The positive outlook on the asset-quality score is aligned with that on the OE score, reflecting the possibility of an improved assessment should the OE score be revised upwards.

Sustained Profitability Recovery: BCA's earnings and profitability score reflects Fitch's belief that the bank's profitability would be sustained in the next 12-18 months, supported by high loan growth and lower credit costs. Fitch expect pressure on BCA's net interest margin from declining interest rates to be minimal, given the bank's sizeable proportion of loans with lending rates that will be slow to change and a large proportion of fixed-rate securities in its book.

Satisfactory Capital Buffer: BCA's capitalisation and leverage score is the highest among Fitch-rated large Indonesian banks and reflects our belief that BCA's capital provides a satisfactory buffer against potential asset-quality deterioration, which we expect to be manageable in the next 12-18 months. BCA's common equity Tier 1 (CET1) ratio rose to 28.4% by June 2023 (2022: 25.9%), despite continued high loan growth and a further rise in the dividend payout ratio to 62% (2021: 57%), due partly to adoption of Basel III risk-weight standards.

Market-Leading Funding Profile: BCA's leading domestic deposit franchise is reflected in its high 81% share of low-cost current accounts and savings accounts in its total deposits as of June 2023, which results in low funding costs and, ultimately, a funding and liquidity score that is among the highest among Indonesian banks. Its strong liquidity is evident in its low loan/customer deposit ratio of 69%, well below the industry's 83%.

We have revised the score's outlook to positive to reflect Fitch's view that BCA's funding profile, which currently constrained by the OE score, is stronger than that of its large bank peers, which would allow for differentiation if the OE score is revised upward.

Systemic Importance Drives GSR: BCA's GSR of 'bbb-' is aligned with our assessment of government support for typical domestic systemically important banks (D-SIBs) in Indonesia. BCA is designated as a D-SIB with top-bucket capital surcharge of 2.5% along with two other large state-owned banks. Our GSR also takes into consideration the Indonesian sovereign's ability - reflected in the sovereign rating (BBB/Stable) - 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 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 deteriorates significantly, which could result from a simultaneous and/or multi-notch downgrade in its key rating drivers. This would most likely happen if we lowered 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 12-18 months. The VR may also be downgraded if BCA's loan quality deteriorates significantly, such that the NPL ratio rises to - and is sustained above - 5%, which should result in 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 were to decline considerably, which could occur 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 were to deteriorate sharply. Fitch perceives these factors to be unlikely in the near to medium term.

BCA's National Long-Term Rating could be downgraded if BCA's credit profile deteriorates relative to other rated issuers in Indonesia's national rating universe, which could happen if its Long-Term IDR is downgraded. BCA's National Short-Term Rating could be downgraded if the National Long-Term Rating 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 would be likely to 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 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 that 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 has been assigned above the 'b' category implied score for the following adjustment reason: sovereign rating (positive)

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

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 the Indonesian sovereign rating, based on our expectation of extraordinary support.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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