Fitch Ratings has affirmed PT Federal International Finance's (FIF) Long-Term Issuer Default Rating (IDR) at 'BBB'.

Concurrently, Fitch Ratings Indonesia has affirmed the National Long-Term Rating at 'AAA(idn)' and the National Short-Term Rating at 'F1+(idn)'. The Outlook on the long-term ratings is Stable.

The ratings on the company's bond programmes and issues have also been affirmed. In addition, Fitch has assigned FIF a Shareholder Support Rating of 'bbb' in line with our updated Non-Bank Financial Institutions Criteria, dated 31 January 2022.

'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.

'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. Under the agency's National Rating scale, this rating is assigned to the lowest default risk relative to others in the same country or monetary union. Where the liquidity profile is particularly strong, a '+' is added to the assigned rating.

Key Rating Drivers

Parental Support Underpins Ratings: The ratings are driven by Fitch's expectation of a high probability of extraordinary support for FIF from the parent, PT Astra International Tbk (AI), if needed. AI is one of Indonesia's largest conglomerates and a market leader in the domestic automotive and heavy equipment industries. FIF is fully owned by AI, which is 50.1% owned by Hong Kong-based Jardine Matheson Group's Jardine Cycle & Carriage Ltd.

Core Subsidiary: Our parental support assessment stems from our opinion that a default by FIF would risk significant reputational damage to AI, due to the two entities' overlapping lender bases and AI's longstanding ownership of FIF. In addition, FIF plays a highly strategic role in AI's automotive value chain as the largest financier for purchases of Honda motorcycles manufactured by PT Astra Honda Motor, a 50:50 joint venture between AI and Honda Motor Co., Ltd (A/Stable). FIF is also a key profit contributor within AI's financial services segment.

Moderate Standalone Profile: FIF's standalone credit profile does not drive its ratings, but reflects its high concentration in riskier motorcycle financing and moderate market position within Indonesia's overall financial system. This is balanced by the company's established underwriting and risk management processes that help to underpin generally steady asset quality and profitability, and stable funding costs benefiting from its status as a subsidiary of AI.

Sustained Recovery: The non-performing financing (NPF) ratio of 0.9% in 1H22 (2021: 0.9%) remained significantly lower than the industry's 2.8%, while pretax income/average assets improved to an annualised 12.0% (2021: 9.9%) amid lower funding and provisioning costs. Legacy restructured loans have mostly run down and have largely resumed regular repayment schedules.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

FIF's ratings are driven by AI's credit profile, which Fitch believes to be stronger than the standalone profile of FIF. Any deterioration in AI's credit profile or weakening in perceived support propensity from AI would be negative for FIF's long-term ratings.

A notable decline in AI's ownership or significant increase in FIF's management independence would also exert downward pressure on the long-term ratings, although Fitch considers this to be unlikely in light of FIF's strategic importance to the business of Astra Honda Motor and AI's financial services sector.

The National Short-Term Rating would be resilient to at least a three-notch downgrade of the National Long-Term Rating.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch may take positive action on FIF's Long-Term IDR in the event of a significant improvement in AI's credit profile - indicating a strengthened ability to support FIF - along with an upgrade of Indonesia's Country Ceiling, although a near-term upgrade of FIF's Long-Term IDR appears unlikely. There is no upside for FIF's National Ratings because they are already at the highest point on our national scale.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

FIF's foreign-currency bond programme is rated at the same level as its Long-Term IDR, while its rupiah debt programmes and associated bonds are rated on a par with its National Long-Term Rating, in line with Fitch criteria. This is because the instruments represent direct and senior obligations of the company and rank equally with all its other senior obligations.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

Any action on FIF's Long-Term IDR or National Long-Term Rating would lead to corresponding action on the ratings of its foreign- and local-currency bond programmes, respectively, and the underlying notes.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

FIF's ratings reflect Fitch's expectation of high probability of extraordinary support from its parent, AI, if needed.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www/fitchratings.com/esg

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