Fitch Ratings has affirmed PT Bank Syariah Indonesia Tbk's (BSI) Long-Term Issuer Default Rating (IDR) at 'BBB-'.

At the same time, Fitch Ratings Indonesia has affirmed BSI's National Long-Term Rating at 'AA+(idn)'. The Outlooks are Stable.

The affirmation of BSI's support-driven ratings reflects Fitch's expectations that the overall likelihood of extraordinary support from its largest shareholder, PT Bank Mandiri (Persero) Tbk's, in case of need, remains unchanged. We recently upgraded Mandiri's support-driven Long-Term IDR to 'BBB' and National Long-Term Rating to 'AAA(idn)', after reassessment of the government's propensity to support Mandiri as a group, which comprises a large and systemically important state-owned bank at its core and subsidiaries that form Indonesia's largest banking group.

'AA' National Long-Term Ratings denote expectations of a very low level of default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country's highest-rated issuers or obligations.

'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. Where the liquidity profile is particularly strong, a '+' is added to the assigned rating.

The bank's Viability Rating and xgs ratings were not part of this review.

Key Rating Drivers

Ratings Driven by Mandiri's IDR: Fitch views that Mandiri has high ability to support its subsidiaries, including BSI, evident from the upgrade of its ratings. We maintain Mandiri's Long-Term IDR as the anchor rating for BSI as we believe the Indonesian sovereign would allow extraordinary state support to flow through Mandiri to BSI, if needed. This considers that BSI is Indonesia's sixth-largest bank with 3% of system assets and 41% of sharia banking assets, at end-2023. BSI is designated a domestic systemically important bank (D-SIB), which buttresses our view that regulators would favour support.

Our belief that support would flow through to BSI also considers that the bank's formation was a government initiative, in which Mandiri was chosen to be the banking group under which BSI is held. In addition, it has leadership in Indonesia's sharia banking system, which is an important segment in the country's financial sector and a key means to enhance financial inclusion.

Potential Divestment Constrains Support Propensity: Fitch believes that there is potential in the medium term for BSI to be divested to be a standalone bank under the direct ownership of the government. This constrains our view on shareholder support propensity as it tempers our assessment of BSI's role in the Mandiri group.

Our assessment of the likelihood of government support flowing to BSI also considers the government's propensity to support other state-owned banks whose Government Support Ratings (GSR) are anchored from the sovereign's Long-Term IDR. We believe that BSI's support-driven IDR and National Ratings - which are ultimately credit-linked to Indonesia's Long-Term IDR - reflect the likelihood of receiving extraordinary state support compared to larger D-SIBs in Indonesia.

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Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of Mandiri's Long-Term IDR could lead to a downgrade of BSI's Long-Term IDR and Shareholder Support Rating (SSR). A downgrade of BSI's Long-Term IDR and SSR could also stem from weaker linkages between Mandiri and BSI, which could happen if Mandiri's ownership in BSI falls below 50%. A material decline in BSI's share in the sharia banking market and the banking system, such that we believe it would no longer be classified as a D-SIB by the Indonesian regulator, could also result in a downgrade. BSI's Short-Term IDR would be downgraded if its Long-Term IDR is downgraded.

A downgrade of BSI's National Long-Term Rating could arise from a weakening in its overall credit profile relative to the universe of entities rated on the Indonesian national rating scale. This could happen if we downgrade its Long-Term IDR. BSI's National Short-Term Rating would be resilient to up to a four-notch downgrade of its National Long-Term Rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of Indonesia's sovereign rating could result in an upgrade of BSI's IDRs and SSR. A reassessment of BSI's importance to the Mandiri group could similarly result in an upgrade of these ratings. The National Long-Term Rating could be upgraded if we view that its overall credit profile has strengthened relative to the universe of entities rated on the Indonesian national rating scale.

There is no upside for its National Short-Term Rating as it is already at the highest point on the 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

BSI's support-driven ratings are credit-linked to Bank Mandiri's IDR based on our expectation of extraordinary support.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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