Rating Rationale - PT Bank Pembangunan Daerah Sumatera Selatan

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PT Bank Pembangunan Daerah Sumatera Selatan

PEFINDO upgraded the ratings for PT Bank Sumsel (BPSS or the bank) and the bank’s Bond I/2003 of IDR200 billion to “_idBBB” from “_idBBB-”. The ratings reflect the bank’s ability to improve its business position in the region as well as maintain relatively favorable margins. Nevertheless, those strengths have been moderated by the bank’s increasing non performing loans (NPL) level. BPSS was established on November 16, 1962 as Bank Pembangunan Daerah Sumatera Selatan. In October 2001, the bank’s name and status were changed to Perseroan Terbatas Bank Pembangunan Daerah Sumatera Selatan (PT Bank Sumsel). As to date, Provincial Government of Sumatera Selatan is the major shareholder with 45.9% ownership, while the remaining is owned by several Municipal Governments in Sumatera Selatan (54.1%). As of December 2004, BPSS employs 825 staffs to operate its 59 offices (including Jakarta office) and 33 self owned ATMs, which are also linked to ATM BCA.

The rating upgrades reflect the bank’s:

Continually improving business position within the region. BPSS’s business position measured by market shares within the region continually improved over the years. The bank’s total deposits increased from IDR1.4 tn in FY03 to IDR2.0 tn in FY04, which resulted in market share improvement in deposits from 9.5% in FY03 to 10.8% of South Sumatra’s total deposits in FY04. The bank had also succeeded to strengthen its customer base by offering several new products. As a result by the end of 2004, the bank’s non-PEMDA deposits had increased to IDR1.01tn, representing 52 % of the bank’s total deposits (vs. 47% in FY03). The bank’s product Tabungan PESIRAH, which offers a car prize every year for each branch, has successfully allured 55,000 depositors since its launching two years ago. Total loans also have grown further from IDR1.2 tn in FY03 to IDR1.5 tn in FY04 and IDR1.6 tn in 1Q05, representing an increase in market share from 17.7% in FY03 to 18.6% of total loans in South Sumatera area as of FY04. Moreover, to enlarge its market coverage, BPSS has expanded its operation to several small and remote cities within South Sumatera to serve civil servants. In addition, BPSS has been able to help distributing teacher salaries and aids from the central government. During 2004, the bank managed to open 10 additional branch offices, which are online on real time basis.
Strong ability to maintain favorable margins. Despite the gradual increases in market interest rates, the bank has been able to preserve its favorable margins above the industry’s average. With the financing focus on SMEs and civil servants loans, the bank managed to increase its net interest revenue (NIR) to IDR206.4 bn in FY04 from IDR155.4 bn in FY03. At the same time, the bank had succeeded to shift its funding structure to become more favorable. Demand and saving deposits, which are less expensive compared to time deposits, constituted higher portion of nearly 65% of total third party deposits at the end of 2004 compared to 60% previously. Consequently, the bank’s net interest margin (NIM) as measured by NIR/Average Earning Asset improved to 9.6% in FY04 from 9.2% in FY03, standing favorably compared to the average peers’ of approximately 7.1% and 6.4% during the period.

However, the ratings are moderated by the Bank’s:

Increasing non performing loans. Although BPSS’s NPL is still far below BI’s NPL maximum limit of 5% (net), it had gradually increased during the past two years. The NPL ratio measured by total gross non performing loans against gross loans and advances has increased to 4.0% in FY04 from 3.4% in FY03 and 2.1% in FY02 compared to the average peers’ in our portfolio of only 2.0% as of December 2004. The worsening ratio was related to the bank’s strategy to finance productive sector since 2003, which was expected to be able to boost regional economic growth. Following the implementation of this strategy, the bank’s composition of civil servants’ loans (PNS loan) only represented 44.1% of total loans in FY04 compared to approximately 65% in FY02. The PNS loans are considered secured, since all the loan installments are directly deducted from monthly salaries that are paid through the bank and therefore non-performing loans from this type of loan is very insignificant. Going forward, the bank is going to increase its PNS loans and thus asset quality can be improved again.

OUTLOOK

A “stable” outlook is assigned to the above ratings. The bank’s strategy to refocus on its captive market, Civil servant loans, should improve its asset quality going forward. The completion of infrastructure as well as technology advancement during the last several years, should also aid the bank to provide wide range of products as well as services to its customers, which in turn should improve its deposit taking ability.

For any inquiries, please contact Pinky at (6221) 521-00077 or Fax at (6221) 521-0078 or by e-mail corpcom

This document is for information only and for the use of the recipient. The ratings have been arrived by virtue of information supplied by applicants of which the accuracy and completeness are the sole responsibility of the applicants. These ratings do not constitute a recommendation to acquire, dispose of, or hold on to any debt instrument issued by virtue of, or related with, these ratings so that PEFINDO shall not liable for any damages/losses arising from, or related to, the utilization of these ratings does not advise nor give any option that any document issued by virtue of, or related to, these ratings are enforceable in accordance with its terms.