Fitch Ratings-Jakarta-25 November 2016: Fitch Ratings Indonesia has upgraded the National Long-Term Rating of PT BFI Finance Indonesia Tbk (BFI) to 'AA-(idn)' from 'A+(idn)' and its National Short-Term Rating to 'F1+(idn)' from 'F1(idn)'. The Outlook is Stable. At the same time, Fitch has assigned a 'AA-(idn)' rating to BFI's notes issued from its medium-term note programme III/2015. A full list of rating actions is at the end of this commentary.
'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs slightly from that of the country's highest rated issuers or obligations.
'F1' Short-Term National 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
The upgrade of BFI's National Ratings reflects its sustained sound financial performance and balance sheet despite the macroeconomic challenges in Indonesia, as reflected in the improvement in its profitability and capitalisation ratios. The ratings also reflect the company's strong stand-alone profile as one of the largest independent finance companies in Indonesia.
BFI has around 3% market share of the total financing industry's assets at end-September 2016. Its core business is used-car and motorcycle refinancing (through direct channels) which accounts for around half of its financing portfolio. The remainder primarily consists of car financing through dealers and the leasing business, where asset quality has weakened significantly in current economic slowdown. The management aims to strengthen its profitability and asset quality by shifting to re-focus on its core refinancing business and reduce exposure to new car and heavy equipment financing.
BFI reported healthy profitability at end-September 2016 that was well above the industry average. Return on equity (ROE) was 18.0% and return on assets (ROA) was 6.3% (2015: 17.1% and 6.3%), and compared favourably to the industry averages of 11.5% and 3.7%, respectively. The improvement in profitability stemmed from its re-focus on the refinancing business, while effectively managing operating cost and containing increased credit costs.
The company's capital profile remains stronger than most peers, underpinned by its solid internal capital generation. Its equity to assets ratio increased to 35.9% at end-September 2016 (2015: 34.1%), one of the highest in the industry. BFI's funding sources are diversified between bank loans (58%), bonds and medium-term notes (23%), and non-recourse joint-financing (19%). Fitch believes BFI's low leverage of below 2x, maintenance of a positive asset-liability gap and strong earnings buffer should provide the company with an adequate cushion to withstand market shocks.
Fitch views BFI's asset quality as resilient, notwithstanding an increase in its NPL ratio (for loans more than 90 days overdue) to 1.8% at end-September 2016 from 1.3% at end-2015. The increase in NPLs mainly stemmed from BFI's leasing business, primarily related to financing of heavy equipment and machinery. Nonetheless, its ratio remained below the industry average of 2.2%, despite its predominantly lower-income customer target market. Fitch believes that the company's strategy to refocus towards the refinancing business, its core competence, and reduction in exposure to heavy equipment and dealer-channel car financing, should benefit its asset quality in the near to medium term.
RATING SENSITIVITIES
A significant weakening of asset quality that could adversely impact profitability and capitalisation may exert downward pressure on its ratings. Sustainable growth that results in significantly higher market share, while maintaining solid asset quality, may lead to a rating upgrade, although Fitch views this scenario as unlikely in the near to medium term.
The ratings on BFI's rupiah-denominated senior bonds and medium-term notes are the same as the company's National Ratings in accordance to Fitch's criteria. Any changes to the National Ratings would affect the issue ratings.
Full list of rating actions:
- National Long-Term Rating upgraded to 'AA-(idn)' from 'A+(idn)'. Outlook Stable
- National Short-Term Rating upgraded to 'F1+(idn)' from 'F1(idn)'
- Medium-term notes assigned 'AA-(idn)' rating
- Rating on senior bond programmes and tranches under the programmes upgraded to 'AA-(idn)' and 'F1+(idn)' from 'A+(idn)' and 'F1(idn)'.
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