TEXT-Fitch affirms PT Sarana Multigriya Financial Persero at 'AA(idn)'

(The following statement was released by the rating agency)

June 26 - Fitch Ratings has affirmed PT Sarana Multigriya Finansial (Persero)'s (SMF) National Long-Term Rating and its rupiah senior bond at 'AA(idn)'. The Outlook is with Stable. SMF's National Short-Term rating and its medium term notes has also been affirmed at 'F1+(idn)'.

The affirmation reflects Fitch's view of strong support from central government, which was evident in its capital injection of IDR1trn in December 2011. This view of support is based on its 100% state ownership and its policy role in developing a secondary mortgage market in Indonesia. Downward rating pressure may arise from a downgrade in the sovereign's ratings or dilution in the government's propensity to provide financial support to SMF. However, Fitch views these as remote prospects in the near- to medium-term.

Loans to banks and finance companies grew significantly to IDR3.5trn in Q112 and IDR2.5trn in 2011 from IDR1.4trn in 2010, due to increasing mortgage demand amid low interest rates. The loans were extended to eight financial institutions, mainly to the state-owned PT Bank Tabungan Negara (Persero)'s (BTN, 'AA(idn)'/Stable), a major provider of domestic mortgages (75% of total loans). These mortgage lenders apply SMF's strict lending criteria on top of their own in their loan disbursements to borrowers; at end-March 2012 all loans were classified as performing. Fitch believes that SMF will be able to expand its loan portfolio by IDR2trn in 2012, supported by equity and debt issues. SMF has focused on long-term bonds to reduce maturity mismatch between its assets and liabilities.

Fitch notes that SMF's role is expanding as it facilitated the launch of four of BTN onshore residential mortgage-backed securities totaling IDR1.95trn in 2009-2011. It provided credit enhancements to these transactions and subscribed to the senior tranches of the RMBS (5% of SMF's total assets at end-March 2012) to support the development of the domestic secondary mortgage market. This is in line with SMF's long-term plan to develop its role as credit guarantor for mortgage lenders or mortgage-backed issues in addition to being a fund provider.

Although borrowing costs in the market are low, Fitch expects SMF's profitability to remain thin given its role to provide long-term funding for the primary mortgage market at competitive rates. Profitability is not SMF's main key objective due to its public policy role.

SMF was established by the government of Indonesia in 2005 and is regulated and supervised by the Ministry of Finance.