Fitch Ratings has affirmed the 'BBB-' Long-Term Issuer Default Ratings (IDR) and other international ratings on Indonesian state-owned bank, PT Bank Mandiri (Persero) Tbk.

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

'AA(idn)' 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(idn)' 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: Mandiri's IDRs and National Ratings are driven by its Government Support Rating (GSR). These ratings reflect our expectation of the government's high ability and propensity to extend extraordinary support to Indonesia's domestic systemically important banks, including Mandiri.

Steady Economic Growth: We expect a steady economic recovery, reflected in our GDP growth forecast of 4.8% in 2023 and 5.6% in 2024. We expect Indonesia's economic expansion to support banking sector loan growth, asset quality and profitability. We maintain the operating environment score at 'bb+' with a stable outlook, above the implied 'b' category score; we use the sovereign rating (BBB/Stable) as a positive adjustment to reflect greater market and economic stability than captured by the implied score.

Strong Domestic Franchise: Mandiri's business profile is driven by its status as Indonesia's largest commercial bank as well as its government ownership. The bank benefits from its relationship with state-owned corporates and involvement in government projects. This is reflected in its strong funding franchise and considerable market share in most of the segments in which it operates. Its loan portfolio comprises mostly of large corporate and commercial loans. We maintain Mandiri's business profile score at 'bbb'.

Adequate Lending Standards: We believe Mandiri's lending standards are superior to those of most peers, as reflected in its asset quality and profitability, which exceeded that of the industry during the Covid-19 pandemic. Loan growth has been largely in line with the industry and we expect this to continue in the medium term. We maintain Mandiri's risk profile score at 'bb+'.

Resilient Asset Quality: Mandiri's asset quality score of 'bb' is in line with the implied 'bb' category score, and reflects our expectation of a manageable deterioration after loan forbearance measures fully expire in March 2024. Impaired loans, represented in the non-performing loan ratio, were at 2.2% of gross loans at end-9M22, down from 2.7% at end-2021. This is lower than the peer average of 2.7%.

Improvement in Profitability: We have raised Mandiri's earnings and profitability score to 'bb+', from 'bb', with a stable outlook. We expect Mandiri to sustain its operating profit/risk-weighted assets (RWA) metrics above 4% through to 2024. We expect Mandiri's plan to target higher-yielding assets, coupled with sustained double-digit loan growth, to keep its net interest margin above 5% and support its overall profitability.

Sufficient Capital Ratios: We have maintained Mandiri's capitalisation and leverage score at 'bb+', in line with its implied category score of 'bb'. We expect the common equity Tier 1 (CET1) ratio to remain within the 18% range over the next three years, assuming low double-digit loan growth, a high dividend pay-out ratio at around 60% of net income throughout 2024 and lower reported RWAs in 2023.

Steady Funding Profile: Mandiri's funding and liquidity score of 'bbb-' is above the implied category score of 'bb'. We believe the bank's strong current account and savings account franchise and high portion of retail depositors justify our positive adjustment for its deposit structure. Mandiri's loan/deposit ratio, the core metric for funding and liquidity, increased to 86% in 9M22 (2021: 81%) as system liquidity tightened. However, the current level is still below the past range of 97%-98% and the movement appears to be in line with the industry.

Rating Sensitivities

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

A downgrade of Indonesia's sovereign rating or a perceived weakening of support propensity from the government could lead to a downgrade of Mandiri's GSR, which would lead to a downgrade of its IDRs. A downgrade of Mandiri's National Long-Term Rating would be likely to arise from a weakening of its overall credit profile relative to the national-rating universe of Indonesian financial institutions.

A downgrade of the Viability Rating could stem from a significant deterioration in Mandiri's financial position, but this would only occur amid downward revisions of multiple key rating drivers and would depend on a combination of a larger downgrade of restructured loans compared with our base case, operating profit/RWAs falling to below 2.4% for a prolonged period, the CET1 ratio falling - and remaining below - 17%, and a persistent weakening of the bank's funding and liquidity position. This would be likely to be reflected in a significant increase in the proportion of expensive funding.

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

An upgrade of Indonesia's sovereign rating or our view of an increased support propensity from the government could lead to an upgrade of the GSR, which would also lead to an upgrade of the Long-Term IDRs. An upgrade of the National Long-Term Rating would be likely to arise from a strengthening in the bank's overall credit profile relative to Indonesia's national-rating universe. There is no upside for the National Short-Term Rating, as it is already at the highest point on the scale.

An upgrade of the Viability Rating would depend on a sustained improvement in multiple key rating drivers; for example, if its core ratios in asset quality and capitalisation and leverage were more in line with those of higher-rated peers. This would coincide with the bank maintaining its non-performing, 'special-mention' and restructured loan ratios in line with those of higher-rated peers and its CET1 ratio above 20%.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior Unsecured: Mandiri's foreign-currency denominated senior unsecured bond programme and the bonds issued from the programme have been affirmed, as they are rated at the same level as the bank's foreign-currency IDRs, in accordance with Fitch's criteria. This is because they constitute the bank's direct, unsubordinated and senior unsecured obligations and rank equally with all its other unsecured and unsubordinated obligations. In addition, Indonesia does not have a sophisticated resolution framework, and we believe that these obligations have average recovery prospects.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

A downgrade of Mandiri's IDRs would lead to a corresponding downgrade of the ratings on the bank's bond programme and issue ratings.

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

An upgrade of the ratings on Mandiri's bond programme and issuance would be dependent on an upgrade of the bank's IDRs.

VR ADJUSTMENTS

The operating environment score has been assigned above the implied score due to the following adjustment reason: sovereign rating (positive).

The funding and liquidity score has been assigned above the implied score due to 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

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