OREANDA-NEWS. February 09, 2015. Fitch Ratings Indonesia has affirmed the 'A(idn)' Long-Term National Ratings and 'F1(idn)' Short-Term National Ratings of four Indonesian regional development banks - PT Bank Pembangunan Daerah Riau Kepri (Bank Riau Kepri), PT Bank Pembangunan Daerah Lampung's (Bank Lampung), PT Bank Pembangunan Daerah Maluku (Bank Maluku) and PT Bank Sulut (Bank Sulut). The Outlooks are Stable. A full list of rating actions is provided at the end of the commentary.

'A' Long-Term National 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' 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 - NATIONAL RATINGS
The National Ratings of Bank Riau Kepri, Bank Lampung, Bank Maluku and Bank Sulut reflect Fitch's view that the banks are important to the regional governments to support development of the local economies. Based on their regional significance, Fitch expects potential, but limited, support from the central government even though they are of lower systemic risk compared with other large banks in Indonesia.

As Indonesia's new government focuses on the economic growth of its regions, regional development banks would play an increasingly important role in financing economic activities. At the same time, the financial sector regulator OJK has asked the regional development banks to increase their capital to more than IDR1trn by 2018 (an increase of 47%-76% of their current levels, except Bank Riau Kepri, which already exceeds that level) to strengthen their capital positions.

OJK has also implemented a new regulation that requires regional development banks to make more loans to non-civil servants, particularly micro loans, with a target of such loans making up at least 20% of their loan portfolios by 2018. Aggressive growth in higher-risk segments would pressure the banks' asset quality and their standalone financial strengths due to their lack of experience in underwriting private-sector micro loans. However, the growth in micro loans is unlikely to alter Fitch's view on the banks' importance to their respective regional governments. Loans to non-civil servants (excluding government projects) represent about 4%-7% of these banks' loan portfolios.

The four regional development banks have all maintained adequate capitalisation, with Fitch core capital ratios at 14%-19%, and sustained stronger recurring operating profitability than their larger national peers due to their strong interest margins as a result of their higher lending yields and lower funding cost. The banks all experienced some deterioration in asset quality in 2014. The deterioration is most visible in Bank Sulut where strong loan growth during 2009-2014 and losses related to a natural catastrophe in North Sulawesi led the NPL ratio to increase sharply to 2.4% at end-3Q14 from just 0.5% at end-3Q13. Nevertheless, the banks' asset quality should all be manageable due to their primary focus on lending to low risk civil servants.

Bank Maluku suffered a one-time investment securities loss related to a fraudulent reverse repo transaction, where its counterparty was unable to make payment as agreed. The loss was fully provided for in 2014 and resulted in a slight decrease of in the bank's Tier 1 capital ratio to 15% at end-November 2014 as profit was able to cover most of the loss. The loss exposes weakness in management quality and risk management among small regional banks, which could continue to constrain their standalone financial strengths.

RATING SENSITIVITIES - NATIONAL RATINGS
Downward rating pressure may arise from a weakening of the regional governments' and central government's ability and/or propensity to provide extraordinary financial support to such regional development banks. However, Fitch believes this to be a remote prospect in the near to medium term. Deterioration in the banks' standalone financial profiles is unlikely to impact their National Ratings, given the regional governments' majority ownership in and potential support to these banks.

Upside potential for the banks' National Ratings may arise from the banks' standalone profiles should they successfully close the gap with their larger Indonesian peers in terms of the size of operations and assets, while maintaining sound asset quality records, high core capitalisation and healthy profitability with predominantly low-cost funding bases. However, it is unlikely in the near to medium term that these banks would be able to close the gap with their largest peers.

KEY RATING DRIVERS and RATING SENSITIVITIES- DEBT RATINGS
The ratings of the banks' rupiah-denominated senior bonds are the same as their National Long-Term Ratings in accordance with Fitch criteria. Any changes in the National Long-Term Ratings would also affect these issue ratings.

The full list of rating actions follows:
Bank Riau Kepri
National Long-Term Rating affirmed at 'A(idn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(idn)'
Rupiah senior bond 2011 affirmed at 'A(idn)'

Bank Lampung
National Long-Term Rating affirmed at 'A (idn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(idn)'
Rupiah senior bond 2012 affirmed at 'A(idn)'

Bank Maluku
National Long-Term Rating affirmed at 'A(idn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(idn)'
Rupiah Senior Bond 2011 affirmed at 'A(idn)'

Bank Sulut
National Long-Term Rating affirmed at 'A(idn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(idn)'
Rupiah Senior Bond 2014 affirmed at 'A(idn)'

Contacts:
Primary Analysts:
Julita Wikana (National Ratings for Bank Riau Kepri and Bank Maluku)
Director
+62 21 2988 6808
PT Fitch Ratings Indonesia
Level 20 Prudential Tower
Jl. Jend. Sudirman Kav.79
Jakarta, Indonesia 12910

Iwan Wisaksana (National Ratings for Bank Lampung and Bank Sulut)
Director
+62 21 2988 6807

Committee Chairperson
Jonathan Lee
Senior Director
+886 2 8175 7601

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable.

Additional information is available at www.fitchratings.com.

Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, and "National Scales Ratings Criteria", dated 30 October 2013 are available at www.fitchratings.com.

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