Fitch Ratings has affirmed state-owned PT Bank Rakyat Indonesia (Persero) Tbk's (BRI) Long-Term Issuer Default Rating (IDR) at 'BBB'.

At the same time, Fitch Ratings Indonesia has affirmed BRI's National Long-Term Rating at 'AAA(idn)'. The Outlooks are Stable. In addition, Fitch has upgraded BRI's Viability Rating to 'bbb-', from 'bb+', following a revision of the outlook on the domestic banking sector's operating environment to positive, from stable.

'AAA' National Long-Term Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

'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

Government Support Underpins Rating: BRI's Long-Term IDR is underpinned by our belief of a high probability that extraordinary government support will be forthcoming, if required. Our assessment is based on BRI's systemic importance as Indonesia's second-largest commercial bank, its strategic state ownership and its key role in supporting the country's micro, small and medium enterprise (MSME) segment.

High Support Ability: We believe Indonesia (BBB/Stable) is able to support domestic systemically important banks (D-SIB), including BRI. This takes into consideration the country's small banking-sector assets relative to GDP and moderate financial flexibility, balanced by the high proportion of banking-system assets being owned by banks that may rely on government support in times of stress.

High Propensity to Provide Support: BRI's 'bbb' Government Support Rating (GSR) reflects our expectation of the government's high propensity to provide extraordinary support to BRI, if needed. This is based on the government's emphasis on developing the MSME sector, which is exemplified by supportive regulations and a rising budget allocation to the country's government-sponsored MSME lending programme.

Improving Operating Environment Outlook: We expect the operating environment (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. This should create an environment for the banks to generate satisfactory business volume at acceptable risk levels.

The OE score of 'bb+' with a positive outlook is higher than the implied 'b' category score, due to greater market and economic stability than the core metrics imply. We could raise the OE score upon a further reduction of restructured loans coupled with stable or improving asset quality in the banking system as authorities reduce or remove Covid-19 pandemic-era forbearance measures.

Strong Indonesian Franchise: BRI's business profile score is among the highest of Fitch-rated Indonesian banks. This reflects BRI's robust domestic franchise, signified by its market-leading operating income and high market share in its core operating segment of MSME lending. The bank also has adequate revenue diversification and management quality that we consider to be comparable to that of most large bank peers.

Improving Asset Quality Outlook: BRI's asset quality score reflects our view of its adequate and still-improving balance-sheet profile, amid its declining stock of high-risk loans and satisfactory loan loss provisions against a backdrop of an improving OE. This complements BRI's low single-name concentration and high proportion of insured lending on its MSME exposure. Our positive outlook on the asset quality score is aligned with that on the OE, reflecting the possibility of an improved assessment should we revise the OE score upwards.

Sustained Profit Recovery: BRI's profitability profile has exceeded pre-pandemic levels and we expect it to stay steady amid loan growth, a resilient net interest margin as well as lower credit costs that stem from modest asset-quality pressure and already adequate loan loss reserve coverage. We have raised BRI's earnings and profitability score to 'bbb-' with a stable outlook, from 'bb+' with a positive outlook. This is above the implied 'bb' category score, as we expect BRI to sustain a higher operating profit/risk-weighted assets ratio in the next 12-18 months, which should raise the implied score.

Satisfactory Capital Buffers: We believe BRI's common equity Tier 1 ratio of 25.5% offers a satisfactory buffer against potential credit loss and supports the bank's loan growth. We expect high loan growth and dividend payouts to gradually erode capital, but with a buffer that is significantly above the threshold for a 'bbb' category score. We have revised the outlook on the bank's capital score to positive, from stable, to reflect the improving OE and the bank's loss absorption buffers in this context.

Stable Funding Profile: We expect BRI to maintain satisfactory liquidity at a reasonable cost to support the group's operation. The funding and liquidity score of 'bbb-' is above the implied 'bb' category score, due to Fitch's assessment of the strength of the bank's deposit franchise, which is comparable with that of other large Indonesian banks. We use 'deposit structure' to adjust the score, given our belief that BRI's granular deposit structure and cheap cost of deposits confer a competitive advantage.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of Indonesia's sovereign rating would to lead to a downgrade of BRI's GSR and IDRs. A downgrade could also come from a perceived weakening of the sovereign's ability or propensity to support Indonesian banks. A downgrade of BRI's National Long-Term Rating could arise from a weakening in its credit profile relative to the national rating universe of Indonesian financial institutions.

The Viability Rating could be downgraded if BRI's financial profile deteriorates materially. This could result from a simultaneous or multi-notch downgrade in its key rating drivers and would most likely occur if we lower the OE score or the outlook on the score. However, we do not expect this to happen in the next 12-18 months.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of Indonesia's sovereign rating could lead to an upgrade of BRI's GSR and IDRs. There is no upside for the National Ratings, as they are already at the highest point on the scale.

Further positive action on the Viability Rating is unlikely, even if we were to raise the OE score to 'bbb-', absent significant and sustained improvements that lead to a multi-notch upward revision of key rating driver scores, which is not our base case in the near term.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

BRI's foreign currency-denominated senior unsecured bonds are rated at the same level as its Long-Term IDR, as per Fitch's Bank Rating Criteria, as Indonesia does not have a developed resolution framework with credible senior debt bail-in. The bonds constitute BRI's direct, unsubordinated and senior unsecured obligations and rank equally with all its other senior unsecured obligations. The risk of default is aligned with that of BRI.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

A change in BRI's IDR would lead to a corresponding change of the issue ratings.

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 earnings and profitability score of 'bbb-' has been assigned above the 'bb' category implied score on the following adjustment reason: historical and future metrics (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)

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

BRI's IDRs and GSR are driven by our expectation of extraordinary sovereign support and are credit-linked to Indonesia's sovereign ratings.

ESG Considerations

We have revised BRI's ESG Relevance Score for Human Rights, Community Relations, Access and Affordability to '4' [+], from '5' [+], as this factor does not drive a rating action by itself. The factor differs from the standard score for financial institutions of '2', due to BRI's exposure to underbanked and underserved communities, SME and community development programmes, and financial literacy programmes. This has a positive impact on the credit profile and is relevant to the ratings in conjunction with other factors.

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 www.fitchratings.com/topics/esg/products#esg-relevance-scores

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