RHB Indonesia Morning Cuppa - 26 August 2016- (Banks)

Good morning,

Banks: Back On The Radar

We met with 25 Singapore-based clients during our recent marketing rounds for the Indonesian banking sector. We gathered that clients are generally staying neutral on the sector, due to the rally recorded over the past few weeks. They agree that asset quality should already have bottomed but need to wait a little longer (ie within the quarter) to confirm this. However, with a more supportive macroeconomic outlook, ie lower inflation rate and a gradual pick-up in GDP growth, they agreed to look closely at the sector – as it is also a proxy for Indonesia’s GDP growth.

¨ Softer asset quality pressure going forward. Clients in general agree that asset quality within the system should already have bottomed in 2Q16. Meanwhile, certain banks with substantial exposure to corporate lending will still face pressure for the next few quarters, ie Mandiri (BMRI IJ, NEUTRAL, TP: IDR10,100) and Bank Central Asia (BBCA) (BBCA IJ, BUY, TP: IDR15,700). Some clients highlighted their concerns on Kredit Usaha Rakyat’s (KUR) non-performing loans (NPL) outlook, to which we replied that such a matter will only materialise in 2018 at the soonest, with relatively manageable impact to the banks since the banks can also make a claim with the insurance companies. As such, the higher risk will shift to the appointed insurance companies as they might not have sufficient capacity to disburse all claims made on KUR’s NPL.

¨ Liquidity will remain tight in the short term. Another concern that clients had is on liquidity conditions within the system, as the loan-to-deposit ratio (LDR) stood at 90.3% as of May. We think that the recent relaxation in regulations from Bank Indonesia (BI) will provide additional liquidity in the system. Some of its recent easing policies include lowering the reserve requirement (to 6.5% from 7.5%) as well as including securities issuance as a funding component. The big four banks will not face any major liquidity issues as their CASA deposits will remain at over 50% of total customer deposits for the next two years.

¨ Margin still at a relatively safe level. With the inflation rate still under control, our economist expects the BI policy rate to decrease by another 25bps by the end of the year. Having said that, clients are of the same view and agree that the net interest margin (NIM) will narrow in a more gradual manner. Our projection of a 10bps reduction in NIM for next year to 6.5% seemed fairly reasonable for clients, since some banks still have competitive advantages in their respective business model, eg micro lending in Bank Rakyat Indonesia (BBRI IJ, BUY, TP: IDR12,900).

¨ Maintain OVERWEIGHT. We prefer companies that will benefit from the Government’s infrastructure projects. Among our sector Top Picks is Bank Negara Indonesia (BBNI IJ, BUY, TP: IDR6,200) given its strong focus on state-owned enterprise (SOE) lending, stabilised credit cost and it having the second lowest blended CoF after BCA. We also like Bank Tabungan Negara (BTN) (BBTN IJ, BUY, TP: IDR2,420) for its resilient market presence in the lower mortgage size segment and improved asset quality. Credit cost will also still be manageable for BTN, due to its substantial exposure to mortgages that are guaranteed by collateral in the form of the properties themselves. (Eka Savitri)

Link to report: Back On The Radar

Link to Daily report: Indonesia Morning Cuppa 260816

Media Highlights:

Economics

Finance Minister: expect even deeper cuts in 2016 revised state budget

Corporates

Bank Rakyat Indonesia interested to acquired Bank Muamalat

Some investors have reported interest to become the shareholders of the first sharia bank in Indonesia, Bank Muamalat, including Bank Rakyat Indonesia (BBRI IJ, BUY, TP: IDR12,900). BRI has informed the Financial Service Authority (OJK) regarding its interest to acquire Bank Muamalat and the decision has been approved by the OJK. Other investors that are interested including Bank Permata, Bank Mega, and Standard Chartered reported their interest to acquire Bank Muamalat in 2011. This plan was revisited due to Bank Muamalat’s additional capital need for business expansion. (Kontan)

Comment: we believe such plan is still in the early stage given that Government as BRI’s majority shareholders will prioritize SOE-holding plan first. Bank Muamalat has continued to explore several corporate actions with regards to find new shareholders due to its capital constraints since three years ago, ranging from going public to finding new strategic buyers. As of June-2016, capital adequacy ratio (CAR) stood at 12.8% with gross non-performing financing (NPF) of 7.3% while other sharia banks mostly own conventional bank as its holding, make them easier to get capital support. (Eka Savitri)

Bank Jabar Banten is ready to issue medium-term notes in 2H16

Kimia Farma to continue aggressive expansion

Krakatau Steel aims IDR1.8trn right issue

Medco lower right issue target

Timah to lower production

Bank Rakyat Indonesia interest to acquired Bank Muamalat

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