CLSA Indo : Banks update – interesting options

Today is the much anticipated release of the Jan11 inflation numbers.  Most analysts estimate the Jan11 MoM inflation number to be around 0.5% to 1%.  Expectations are on the higher-end.  At the same time Bank Indonesia governor continues to signal preference for other measures than interest rate hikes – such as hiking the reserve requirement ratio (RRR).

Key points from the report:
·         Bret Ginesky shows that Indonesia has one of the lowest RRR across Asia, third lowest after Thailand and Korea (see daily chart below).
·         US$2.4bn will be drained from the system by increasing IDR and USD RRR by 100bp – perhaps more drastic than increasing benchmark interest rates.
·         Impact?  Banks, especially the ones with higher LDR (BBRI, BDMN, BBTN) will likely rely more on interbank rates which results in lower NIM from higher interbank rates.
·         More neutral for banks with low LDR such as BBCA, BBNI, and BMRI. They will make more money from interbank market, but will need to put aside money for reserve.
·         Banks are certainly facing headwinds in this environment but value is starting to emerge – BBNI and BMRI are trading at 1.9x and 2.6x book respectively. BUY on weakness.