Bank Sinarmas Tbk PT : Fitch Affirm Bank Sinarmas At 'A(IDN)'; Outlook Stable

FITCH AFFIRMS BANK SINARMAS AT 'A(IDN)'; OUTLOOK STABLE

Fitch Ratings-Jakarta-19 December 2016: Fitch Ratings Indonesia has affirmed Indonesia-based PT Bank Sinarmas Tbk's (Bank Sinarmas) National Long-Term Rating of 'A(idn)' and National Short-Term Rating of 'F1(idn)'. The Outlook is Stable.

'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

Bank Sinarmas' ratings are derived from its standalone credit profile and reflect its small franchise, appetite for loan growth and the associated risk to its asset quality, as well as its modest capitalisation and satisfactory funding and liquidity profile.

Bank Sinarmas had just a 0.4% share of the Indonesian banking industry's total assets at end- September 2016. The bank is part of PT Sinarmas Multiartha Tbk (SMMA), which is a holding company of the Sinarmas Financial Services Group that directly holds 56.07% of Bank Sinarmas' shares. SMMA is a non-operating holding company that focuses on the financial services sector, including banking, multi-finance, insurance and stock broking.

The bank's ratings are constrained by its high loan growth, which has historically been above the industry average. The majority of its portfolio is in corporate lending (60.2% of the portfolio at end-September 2016). However, management projects higher growth from its commercial lending, particularly to micro-, small- and medium-sized merchants and traders (MSMEs). Fitch expects the rapid growth of Bank Sinarmas' MSME lending to raise the risk of deterioration in asset quality in the future.

Bank Sinarmas has a weak asset-quality profile. Its non-performing loan (NPL) ratio of 3.4% at end-September 2016 (2015: 3.7%) remained above the industry average of 3.1%. Its "special- mention" loan ratio of 11.6% (2015: 14.2%) was much higher than the industry average of 5.4% and points to potentially higher NPLs in future should operating conditions deteriorate. Provision coverage for NPLs at 39.6% was well below the industry average of 106.5%.

The bank's profitability improved at end-September 2016, primarily due to growth in its average lending yield from a greater proportion of higher-yielding MSME loans in its portfolio and better cost efficiency. Return on assets (ROA) rose to 1.5% at end-September 2016 (end-2015: 0.8%) as a result. Nonetheless, Fitch expects the bank's profitability to be challenged in 2017 from tighter competition in deposit funding and potentially higher credit costs.

Bank Sinarmas' capital position is satisfactory as reflected in its Fitch Core Capital ratio of 18.4% at end-Sep 2016, which was boosted by a rights issue in May 2016 that raised IDR436bn in fresh capital. However, Fitch believes the bank's capital position could quickly be eroded by high growth

due to the bank's modest internal capital generation and potentially higher credit costs arising from its rapid loan expansion in recent years.

Fitch views that the bank has a satisfactory funding and liquidity profile. Customer deposits made up 93.7% of its total funding. Low-cost current and savings accounts made up 54.3% of total deposits at end-September 2016, in line with industry average of 54.1%. Its loans to deposits ratio (LDR) stood at 85.0%, lower than the industry average of 91.5%.

Fitch believes Bank Sinarmas is of limited importance to the holding company, which has many interests in the financial sector. In addition, Bank Sinarmas is sizeable relative to SMMA in terms of total assets, which reduces the holding company's ability to provide support to the bank, even though SMMA has strong willingness to do so. Fitch's assessment of SMMA's credit strength is based on the composite credit profiles of PT Asuransi Jiwa Sinarmas MSIG (Sinarmas MSIG), the group's insurance arm, and Bank Sinarmas. The two companies together accounted for 71.5% of SMMA's assets at end-September 2016.

RATING SENSITIVITIES

Sustained aggressive loan growth or significant weakening in asset quality could lead to negative rating action.

Rating upside may result from the bank's ability to maintain its loan growth in line with the industry, while sustaining sound asset quality and adequate core capitalisation.

Contact: Primary Analyst Priscilla Tjitra

Associate Director

[phone]

PT Fitch Ratings Indonesia DBS Bank Tower Level 24 Jl. Prof. Dr. Satrio Kav.3-5 Jakarta, Indonesia 12910

Committee Chairperson Jonathan Lee

Senior Director

[phone]

Media Relations: Leslie Tan, Singapore, Tel: [phone], Email: [e-mail].

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 on www.fitchratings.com Applicable Criteria

Global Bank Rating Criteria (pub. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051 National Scale Ratings Criteria (pub. 30 Oct 2013)https://www.fitchratings.com/site/re/720082

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