Jakarta, March 4, 2023 - Fitch Ratings Indonesia (Fitch) has upgraded PT BFI Finance Indonesia Tbk (BFI Finance)'s National Long-Term Rating to 'AA-(idn)', from 'A+(idn)'. The Outlook is Stable. Fitch has also upgraded the National Short-Term Rating to 'F1+(idn)', from 'F1(idn)', and the local-currency issuance ratings to 'AA-(idn)', from 'A+(idn)'.
The upgrade reflects that BFI Finance's liquidity coverage and debt repayment capacity will remain healthy and commensurate with the higher rating, even as financing grows strongly amid a post Covid-19 pandemic recovery. This should be underpinned by BFI Finance's acceptable asset quality, adequate profitability and modest leverage.
'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
Satisfactory Credit Profile: The rating upgrade reflects that BFI Finance's above-peer profitability, modest leverage appetite and steady liquidity policy will help it maintain satisfactory debt repayment capacity, commensurate with its higher rating level. These credit strengths to endure through credit cycles, backed by BFI Finance's status as Indonesia's largest independent finance and leasing company, leadership in its niche of used-vehicle financing and experienced management team.
Used Vehicle Financer: BFI Finance mainly operates in used-vehicle refinancing, which contributed 77% of its portfolio in 2022, primarily with used cars as collateral. BFI Finance has a leading market share of 20% in the used-vehicle financing segment. BFI Finance has diversified into other business segments, such as heavy-equipment and property-based financing, although these remain modest.
Acceptable Asset Quality: BFI Finance's established risk monitoring and controls to support asset quality through economic cycles, backed by management's experience in its targeted niche, is expected. This is despite BFI Finance's exposure to the higher-risk used-vehicle financing segment. BFI Finance's non-performing financing (NPF) ratio as of 2022 was at 1.0% (2021: 1.3%), below the industry average of 2.3%. Net charge-offs of 1.0% were also below that of many peers. BFI Finance's asset-quality performance has been stable in the past decade, and the Company has resolved its portfolio of pandemic-related restructured loans.
High-Margin Business: BFI Finance's main business segments carry wide margins and tend to cater to less price-sensitive borrowers. This should mitigate the impact of recent benchmark rate hikes, as well as impairment cost volatility on profitability. BFI Finance's pre-tax profit/average assets improved to 11.9% in 2022 (2021: 9.2%; 2022 industry average: 5.6%), amid declining provisioning and funding costs during most of the year. Increasing funding costs are also expected to be manageable for the Company.
Above Average Capitalization: BFI Finance's leverage – measured by debt/tangible equity – increased to 1.4x in 2022 (2021: 1.0x; 2022 industry average: 2.1x) due to 40% loan growth during the year. Nonetheless, the ratio remained modest in absolute terms and leverage to remain below 2.5x as the Company continues to expand, given its conservative leverage tolerance and adequate internal capital generation.
Adequate Liquidity Buffers: BFI Finance is believed to maintain satisfactory liquidity coverage, supported by a positive asset-liability maturity gap that has a degree of resilience to stress, and its substantial amount of unutilized committed funding facilities. BFI Finance had an adequate liquidity coverage profile of 300% in 2022, as measured by (cash + undrawn committed facilities + expected receivables cash inflow in one year) / expected debt repayments in one year.
BFI Finance's bonds are rated at the same level as its National Long-Term Rating, in accordance with Fitch's criteria, as they represent BFI Finance's direct obligations and rank pari passu with its other obligations in the same debt class. The obligations are 50% secured against the Company's receivables.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
− A sustained decline in the coverage ratio to below 2x would be negative for the ratings, as measured by (cash + one year's expected receivables inflow discounted by 50% + unutilized committed facilities) / one year's expected debt repayment outflows.
− A weakened financial profile, including significant asset-quality deterioration, with the NPF ratio remaining at above 2%, a deterioration in liquidity buffers that leads to short-term asset-liability mismatches under stress, or substantially higher leverage. A notable rise in risk appetite, including expansion into untested or riskier products, or loosening in underwriting standards would also be negative for the rating.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
− Positive rating action is only possible if Fitch believes that the operating environment for Indonesia's finance and leasing companies have improved significantly, possibly driven by an upgrade in Indonesia's sovereign rating or significant strengthening in the regulatory framework for non-bank finance companies to standards closer to that for banks, concurrent with a significant improvement in BFI Finance's franchise, business mix and financial profile. However, this is not to be likely in the medium term.
BFI Finance’s bond ratings are sensitive to changes in its National Long-Term Rating. Any negative or positive action on the issuer's National Long-Term Rating will result in corresponding action on the bond ratings.
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.
Additional information is available on Fitchratings.