Fitch Ratings Indonesia has upgraded PT Bank Bukopin Tbk's National Long-Term Rating to 'AAA(idn)' from 'AA-(idn)' and removed it from Rating Watch Positive (RWP). The Outlook is Stable.
The upgrade follows the acquisition of a majority stake in Bukopin by Korea-based Kookmin Bank (Kookmin, A/Negative/a) and reflects our belief that Kookmin's stronger control of the bank results in its greater propensity to support Bukopin. Kookmin increased its stake in Bukopin to 67.0% in September 2020 from 33.9% at end-July 2020.
'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 or monetary union.
KEY RATING DRIVERS
Bukopin's National Long-Term Rating is support-driven and reflects Fitch's expectation that the bank's stronger parent has high ability and propensity to provide timely extraordinary support to its Indonesian subsidiary, should it be needed. Bukopin's rating is linked to its parent's Viability Rating (VR) as we believe there is sufficient uncertainty whether extraordinary support, if required, would flow from the Korean government through Kookmin to Bukopin. In our opinion, potential support will most likely depend on Kookmin's own financial resources.
Fitch believes Kookmin has a strong ability to provide support to its Indonesian subsidiary, taking into consideration its own credit profile and Bukopin's small size relative to its parent. The Indonesian subsidiary's total assets accounted for around 2% of its parent's consolidated assets at end-1H20.
Bukopin provides Kookmin with a foothold in a faster-growing and potentially higher-margin emerging banking market (under normal operating conditions), and we expect synergies and integration between the two banks to grow over time. We believe that the parent has a relatively high propensity to support its subsidiary in the near to medium term despite Bukopin's weak financial performance in the past few years.
Capital and liquidity support provided by Kookmin to the bank in recent months may have helped Bukopin to avoid liquidity issues after the loss of deposits. Nevertheless, we believe that reputational risk would likely be containable for Kookmin in the event of a Bukopin default, largely due to the bank's weak performance track record, current branding, and Kookmin's limited association to date with the new subsidiary. Our assessment also takes into account the parent's majority ownership and our belief that minority shareholders will have a limited influence on Bukopin's operations.
Fitch's view of the bank's standalone profile does not drive Bukopin's rating, but reflects the bank's medium-sized franchise and weak financial profile. The latter includes the bank's stressed asset quality and weaker-than-peer profitability, which we expect to deteriorate in the near term due to the coronavirus pandemic. Capital buffers are significantly weaker than those of peers given its risk appetite, and funding and liquidity may be unstable, although we expect Bukopin's capitalisation and funding and liquidity to benefit from ordinary shareholder support.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Bukopin's National Long-Term Rating would likely arise from a weakening in its support-driven credit profile relative to the entities in the Indonesia national-rating universe. This could result from a considerable deterioration in the parent's rating - a two-notch downgrade of Kookmin's VR would lead to a downgrade of Bukopin's National Long-Term Rating.
A weakening of the parent's propensity to extend support - perceived or real - that may stem from a major reduction in ownership (such as to below 50%) or perceived failure of Bukopin to meet its parent's objectives, could also result in a rating downgrade. The latter could arise, for example, from further deterioration in Bukopin's financial performance or Kookmin being unable to meaningfully improve Bukopin's performance. However, Fitch believes these prospects are limited in the near term.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is no upward rating potential as the bank's rating is already at the highest point on the national rating scale.
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
Bukopin's rating is credit-linked to that of its parent Kookmin, based on our view of potential extraordinary support.
ENTITY/DEBT RATING PRIOR
PT Bank Bukopin Tbk Natl LT AAA(idn) Upgrade AA-(idn)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com