Fitch Ratings Indonesia has affirmed PT Mandiri Tunas Finance's (MTF) National Long-Term Rating at 'AA-(idn)'.

The Outlook is Stable. Fitch has also affirmed the National Short-Term Rating at 'F1+(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 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 or monetary union. Where the liquidity profile is particularly strong, a '+' is added to the assigned rating.

Key Rating Drivers

Shareholder Support Underpins Ratings: MTF's ratings are driven by Fitch's expectation of extraordinary support from its majority shareholder, PT Bank Mandiri (Persero) Tbk (BBB-/AA+(idn)/Stable/bb+), if needed. Mandiri is a state-owned entity and the largest bank in Indonesia by assets at end-9M22. It owns 51% of MTF's equity, while the remaining 49% is held by PT Tunas Ridean Tbk, a prominent car distribution company in Indonesia.

Parent's VR as Anchor: Our support assessment is anchored by Mandiri's Viability Rating, as we believe support for MTF would most likely come from Mandiri's internal resources, if needed. We expect the Indonesian sovereign (BBB/Stable), as the ultimate shareholder, to provide extraordinary support to Mandiri in times of need, but it is less certain whether government support will flow through to MTF. The Stable Outlook reflects our expectation that Mandiri's ability and propensity to support its financing subsidiary will remain steady in the near to medium term.

Significant Market Share: MTF is one of Indonesia's largest non-bank finance and leasing companies, with a market share of around 8% of total financing industry receivables at end-9M22. Its financing franchise benefits from business referrals via Mandiri's broad customer network.

Strategic Subsidiary: MTF provides new car financing to Mandiri's retail, commercial and corporate customers. We view it as a strategically important subsidiary that provides a product integral to the bank's retail offerings. We also perceive close management and operational links between MTF and Mandiri, which add to the shareholder's propensity to support MTF. Mandiri has placed several former executives in senior positions at MTF, and MTF makes significant use of off-balance sheet joint-financing from Mandiri, which funded 48% of MTF's managed receivables at end-9M22 (2021: 53%).

MTF's shared branding with Mandiri and longstanding positive contribution to the bank further strengthen Fitch's belief that Mandiri is motivated to support its subsidiary. We believe Mandiri has the ability to support MTF, based on the bank's relative size and stronger standalone credit profile.

Adequate Standalone Profile: MTF's standalone profile does not directly drive its ratings, but reflects our view of its established franchise as one of Indonesia's largest finance and leasing companies, below-industry non-performing financing (NPF) ratio (0.7% at 9M22; industry: 2.6%) and funding access advantage due to its ownership links and financing facilities from its parent bank. This is counterbalanced by the company's volatile profitability in recent years and higher leverage, with debt/tangible equity of 6.4x at end-9M22.

Rating Sensitivities

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

Any downgrade of Mandiri's Viability Rating would likely lead to a downgrade of MTF's National Long-Term Rating. Negative rating action may also be driven by our view that the shareholder's support propensity has weakened - perhaps caused by deterioration in MTF's performance leading to a sustained weaker contribution to its parent, or a reduction in Mandiri's shareholding in the company. However, we do not expect these events to occur in the near term.

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

The National Long-Term Rating could be upgraded upon an upgrade of Mandiri's Viability Rating, assuming the parent's propensity to support its subsidiary remains intact. Any developments that strengthen Mandiri's propensity to support MTF would also lead to positive rating action, such as a significant increase in Mandiri's shareholding in MTF to above 75%, greater levels of cross-selling between the parent and subsidiary to around 45% of the subsidiary's new bookings, significantly higher proportion of joint-financing from Mandiri, or a considerably greater contribution by MTF to its parent bank.

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

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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