Fitch Ratings Indonesia has affirmed state-owned PT Bank Syariah Indonesia Tbk's (BSI) National Long-Term Rating at 'AA(idn)' with a Stable Outlook and its National Short-Term Rating at 'F1+(idn)'.

Fitch has also affirmed the issue ratings on the bank's rupiah-denominated subordinated sukuk at 'A+(idn)'.

'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. 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

Support-Driven Ratings: BSI's national ratings are driven by Fitch's expectation of extraordinary support from its majority shareholder PT Bank Mandiri (Persero) Tbk (BBB-/AA+(idn)/Stable/bb+), which owns a 51.5% stake in BSI, if required. BSI's ratings are linked to Mandiri's Issuer Default Rating (IDR), reflecting Fitch's belief that support would be allowed from the bank's ultimate parent, the Indonesian sovereign (BBB/Stable).

Government Linkage: Fitch believes BSI is an important subsidiary of Mandiri, given its dominant position in the sharia banking industry in Indonesia, a Muslim-majority country. This is supported by BSI's increasing importance for the Indonesian government, as seen in its issuance of a special share class - typical among Indonesia state-owned enterprises - for the government in 2022.

Systemically Important: BSI is Indonesia's largest sharia bank and the seventh-largest bank by assets with a system market share of around 3%. It has about a 38% market share of the country's sharia bank industry and is a designated domestic systemically important bank with a systemic bank capital surcharge of 1%. We therefore believe the Indonesian regulator, OJK, is likely to favour Mandiri's support of BSI, if needed.

Moderate Support Propensity: Our support assessment also takes into account BSI's important role in the group as it provides service in a strategically important banking segment, the potentially large reputational damage to Mandiri if BSI were to default, and its record of providing ordinary support such as its subscription to BSI's rights issue at end-2022, which saw an increase in its stake to 51.5% from 50.8%.

Moderate Standalone Profile: BSI's standalone credit profile does not drive its national ratings, but reflects its moderate business profile, which is underpinned by its large franchise in the domestic sharia bank industry and financial profile that is comparable with those of its mid-sized domestic bank peers.

Rating Sensitivities

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

A downgrade of Mandiri's IDR would likely lead to a downgrade of BSI's National Long-Term Rating. This could result from a downgrade of the sovereign rating and/or a weakening of the sovereign's support propensity for Mandiri. A downgrade of BSI's National Long-Term Rating could also arise from a weakening in its overall credit profile relative to the universe of entities rated on the Indonesia national rating scale, which could arise from an assessment of weaker linkages between Mandiri and BSI.

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

An upgrade of BSI's National Long-Term Rating would likely result from an increase in the importance of BSI, or the sharia banking industry as a whole, to the government. A significant increase in BSI's market share of the banking system as a whole, such that we believe its systemic importance has increased, could also lead to an upgrade. An upgrade could also arise from a strengthening of its overall credit profile relative to the universe of entities rated on the Indonesia national rating scale.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Subordinated Debt: BSI's Basel III-compliant subordinated sukuk are rated two notches below its National Long-Term Rating. Both notches are for loss severity, reflecting the sukuk's subordination and our view of poor recovery prospects compared with senior unsecured obligations. The Tier 2 debt instruments have an embedded permanent write-down feature (principal and/or interest in full or in part) that can be triggered when the bank approaches its point of non-viability.

There is no additional notching for non-performance risk, as we believe that non-performance is neutralised by potential institutional support from Mandiri. This approach differs for local banks that do not benefit from high levels of parental or sovereign support; for a typical Indonesian bank, Fitch's standard notching for non-performance risk for similar subordinated bonds is one notch to account for the risk of going-concern losses from the deferral of coupon and/or principal.

The sukuk incorporate features that allow coupons to be deferred and accumulated if the bank's capital position falls below its minimum requirements.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

A downgrade of BSI's National Long-Term Rating would lead to a downgrade of subordinated sukuk rating. A reassessment of loss severity or non-performance risk leading to a widening of notching would also result in a downgrade.

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

An upgrade of BSI's National Long-Term Rating would lead to an upgrade of the subordinated sukuk rating. An upgrade would also be possible if factors leading to a narrower notching as outlined in Fitch's Bank Rating Criteria are present. However, we believe this to be unlikely in the near to medium term.

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