BANKING INDUSTRY - Key Success Factors: Business Risk Assessment Market Position

PEFINDO Rating Criteria & Methodology
BANKING INDUSTRY Key Success Factors

BUSINESS RISK ASSESSMENT
Market Position
The analysis includes comprehensive assessments of the bank's market shares and sizes in key
business lines or sectors as well as its future prospect, the bank's existing products, future products,
market expansion, and other real advantages resulting from the bank's market position (pricing
power vs. funding base) either in national market, regional market, or in any specific segment/sector.
The vulnerability of the bank's market position is Also considered by comparing its competitive
advantages against its peers.
Infrastructure And Quality Of Service
The analysis covers detailed assessments on the bank's distribution network such as branches, ATM,
and IT capabilities to support its daily banking operation in an effort to provide better and integrated
products and give better services to its customers. The bank's quality of service is also diligently
assessed, as it is considered as an important factor for a retail bank to attract customers and support
the bank's sustainable growth, particularly in the intense business competition. Other factors that are
also assessed are, among others, employees' capabilities in providing banking services and handling
complaints from customers, speed of services, accessibility, timeliness, and etc.
Diversification
The analysis covers thorough assessments on the bank's business network/base with regard to
geographical/location spread, business lines, products, revenues structures, customers base of
funding and lending, credit risk (broken down by economic sector, size, and customer base), as well
as economic diversity of the bank's market, etc.
Management & Human Resources
The analysis includes detailed assessments on the bank's quality and credibility of the management
and key personnel, the bank's management strategies to maintain sustainable growths (external and
internal), the bank's quality in financial planning and strategy (aggressive vs. conservative), the
bank's organizational structure, the bank's quality of business, which are generally measured from its
underwriting criteria, process of credit approval, delegation of credit approval and authorities,
collateral valuations, monitoring of credit exposures, internal rating/scoring system, tools or system to
identify potential problem exposures as well as roles and reliabilities of internal audit and compliance
department, and the bank's managerial efficiency and effectiveness. The implementation of good
corporate governance, particularly accountability of the management and transparency of its financial
statement, is also reviewed.
FINANCIAL RISK ASSESSMENT
Capitalization
The analysis includes diligent assessments on the bank's capital composition (equity, subordinated
debt, revalued assets, unrealized capital gains, and other types of quasi-reorganization), the bank's
capital position with respect to Central Bank (Bank Indonesia) requirements, level of Capital Adequacy
Ratio (total and Tier 1 CAR), dividend pay out ratio, internal growth rate of capital, ability to get
external sources of capital, capital in comparison with assets, as well as management philosophy and
strategy on leveraging its capital.
Assets Quality
The analysis includes intensive assessments on the bank's non performing loans broken down by
category, the bank's credit portfolio by economic sector, size, and currency, concentration on credit
risks (total exposures to certain industry, company, or individual), settlements on problem loans (past
due loans, restructured loans, or other types of problematic loans), and the bank's loan loss reserve
policy and adequacy.
In addition, thorough analysis is also conducted on the qualitative aspects on assets quality such as
whether the bank fully identifies and discloses its problematic loans, the bank's write off policy and
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September 2014
PEFINDO Rating Criteria & Methodology
whether the bank implements it rightly, and other credit judgment that can provide clues about the
bank's credit culture, policy, and procedures and the effects into its asset quality.
Profitability
The analysis includes thorough assessments on the bank's net interest income and margin (trends,
ability to grow, as well as sustainability), non interest income (size, diversity, as well as growth
potential), quality of earnings, ability to price risks into various products, operating profits, and net
income (trend, sustainability, and potential growth). The bank's cost structure (trends, ability to raise
cheaper funding, stability, and etc), cost to income ratio (to measure efficiency), and management
strategy to control operational expenses and improve fee based income are also diligently assessed.
Liquidity And Financial Flexibility
The analysis covers the assessments on current market condition and its effect on the bank's liquidity,
examination on the bank's liquidity management (in terms of policy and strategy), and ability to earn
immediate cash flow (internally or externally) and its contingency plans to support its liquidity
demand. The examination on the bank's interest rate and maturity mismatches, net open position,
loan to deposit ratio and evaluation on the proportion of the bank's liquid assets as compared to its
short term liabilities are also incorporated in the assessments. Analysis on financial flexibility includes
careful assessments on the bank's ability to access various funding markets and raise capital from
public, or private sources as well as the likelihood of supports from the government, particularly
under distress conditions.
DISCLAIMER
PT Pemeringkat Efek Indonesia (PEFINDO) does not guarantee the accuracy, completeness, timeliness or availability of the contents in this report or
publication. PEFINDO cannot be held liable for its use, its partial use, lack of use, in combination with other products or used solely, nor can it be held
responsible for the result from its use or lack of its use in any investment or other kinds of financial decision making on which this report or publication is
based. In no event shall PEFINDO be held liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages,
costs, expenses, legal fees, or losses including but not limited to lost profits and opportunity costs in connection with any use of the contents of this report
or publication. Credit analyses, including ratings, and statements in this report or publication are statements of opinion as of the date they are expressed
and not statements of fact or recommendations to purchase, hold or sell any securities or to make any investment decision. The contents cannot be a
substitute for the skill, judgment and experience of its users, its management employees and/or clients in making investment or other business decisions.
PEFINDO also assumes no obligation to update the content following publication in any form. PEFINDO does not act as fiduciary or an investment advisor.
While PEFINDO has obtained information from sources it believes to be reliable, PEFINDO does not perform an audit and does not undertake due
diligence or independent verification of any information used as the base of and presented in this report or publication. PEFINDO keeps the activities of its
analytical units separate from its business units to preserve independence and objectivity of its analytical processes and products. As a result, certain units
of PEFINDO may have information that is not available to other units. PEFINDO has established policies and procedures to maintain the confidentiality of
certain non-public information received in connection with each analytical process. PEFINDO may receive compensation for its ratings and other analytical
work, normally from issuers of securities. PEFINDO reserves the right to disseminate its opinions and analyses. PEFINDO public ratings and analyses are
made available on its Website, http://www.pefindo.com (free of charge) and through other subscription-based services, and may be distributed through
other means, including via PEFINDO publications and third party redistributors. Information in PEFINDOs website and its use fall under the restrictions and
disclaimer stated above. Reproduction of the content of this report, in full or in part, is subject to written approval from PEFINDO.
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PEFINDO Rating Criteria & Methodology

BANKING INDUSTRY Key Success Factors

PEFINDO Rating Criteria & Methodology

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