RPT-Fitch Affirms Ratings on Muamalat and Mayapada; Outlook Stable

Mon May 26, 2014 5:20am EDT

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May 26 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed the National Long-Term Ratings on Indonesia-based PT Bank Muamalat Indonesia Tbk (Muamalat) at 'A(idn)' and PT Bank Mayapada Internasional Tbk (Mayapada) at 'A-(idn)'. The rating Outlooks are Stable. Fitch has also assigned National Short-Term Ratings of 'F1(idn)' to Muamalat and Mayapada. A full list of rating actions is provided at the end of this commentary.

'A' National Long-Term Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

'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. On Fitch'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 - National Ratings

The ratings on Muamalat reflect a limited probability of state support, if needed, given Muamalat's importance in the development of sharia-banking in Indonesia. The bank is the second-largest sharia bank by assets in the country despite its small share of total banking system assets of about 1%. Sharia banking assets formed about 4.8% of total banking system assets in 2013. On a standalone basis, Muamalat is weaker compared with other large banks in Indonesia in terms of franchise, profitability and capitalisation.

Muamalat's NPL ratio deteriorated in 1Q14 mainly due to rapid loan growth in the past three years. Its provision cover remained below industry average during the quarter. In Fitch's view, Muamalat's asset quality is likely to come under pressure amid the more challenging economic conditions in 2014. Although its Fitch core capital increased to 11.9% at end-2013 from 7.1% at end-2012 - mainly due to a rights issue that raised IDR1.35tn - the capital could be easily eroded by continued rapid loan growth in the medium term.

The ratings on Mayapada reflect Fitch's view of the bank's smaller banking franchise compared with larger peers, which will result in limited probability of state support, if needed. The ratings also take into account the bank's modest performance with an adequate capital profile, modest profitability and moderate asset quality.

The bank's profitability is likely to be under pressure given an expected rise in funding and credit costs. Mayapada's asset quality improved in April 2014 due to the bank's stricter risk management. In order to strengthen its capitalisation, Mayapada issued IDR700bn of subordinated debt and had a IDR300bn rights issue in 2013. Further improvement in Mayapada's franchise is limited because of intensifying competition in the market. Mayapada was able to maintain its loan-to-deposit ratio at 87% at end-2013 because expansion of its deposit base kept pace with loan growth. However, higher cost deposits that were not current or savings accounts made up approximately 86% of total deposits at end-2013.

The Stable Outlooks reflect Fitch's expectation that the banks will maintain steady risk profiles by pro-actively making provisions over the near to medium term amid more challenging economic conditions that could trigger increases in non-performing loans. Deposit competition and higher interest rates might hamper deposit-gathering efforts and might squeeze the liquidity of these banks, which have weaker franchises compared with larger peers.

RATING SENSITIVITIES - National Ratings

Rating upside for these banks may result from sustained improvements in asset quality, maintenance of strong risk-adjusted profitability and high core capitalisation and predominantly low-cost deposit-funded balance sheets.

Negative rating action may result from significant deterioration in asset quality and weakening profitability for Mayapada and Muamalat as well as diminishing government support for the sharia-banking industry in Muamalat's case.

The full list of rating actions follows:

Muamalat:

National Long-Term Rating affirmed at 'A(idn)'; Outlook Stable

National Short-Term Rating assigned at 'F1(idn)'

Mayapada:

National Long-Term Rating affirmed at 'A-(idn)'; Outlook Stable

National Short-Term Rating assigned at 'F1(idn)'

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