Bank Central Asia - Loses Cobranding relationship with Carrefour - ALERT - JP Morgan

Card co-branding relationship with Carrefour Indonesia to be wound down? Bisnis Indonesia reported that BCA's co-branding relationship with Carrefour could be terminated. Subsequent to the Para group's acquisition of a strategic stake in Carrefour Indonesia, the cobranding relationship is likely to shift to Bank Mega (not covered), which is affiliated to the Para group – with the shift beginning in mid-April.

Could affect 15% of BCA’s card base, significant at first sight: BCA has 2.2m cards in circulation (16.6% of the 13.2m credit cards in issues as of Oct 2010) and growing at 9% p.a. The Carrefour co-branded cards would account for about 15% of their outstanding base (estimated at 300,000 cards in the news report cited) – which at first sight would appear a potentially significant loss.

But BCA should be able to retain the relationship: Our discussions with management lead us to surmise that a majority of the Carrefour cobranded cards are additional which have been issued to avail of discounts - rather than primary credit card relationships, which could limit the magnitude of relationship loss. We also note that BCA, uniquely among Indonesian Banks, requires credit hard holders to be depositors – which means the banking relationship will be retained

Risk is if relationship loss broadens to transaction banking: Carrefour is one of the largest retailers in Indonesia, with a reported Indonesia Revenue of 823m Euro in 9MFY10. Our understanding is that BCA would be the transaction bank for Carrefour in Indonesia. While we think the loss of retail relationships could be contained due to BCA’s deposit relationships, we worry if this precedes a broader risk to the commercial banking relationship.

BCA’s infrastructure should help protect competitive position, but a risk worth watching: Given BCA's transaction capacity (on its own network ) and its branch distribution (900 branches, 100k EDC’s) which are concentrated in urban areas’ we believe that infrastructure would give it an edge in maintaining its commercial banking relationship with a major retailer. In contrast Bank mega has a network of 325 branches, but could arguably cover urban agglomerations where Carrefour focuses quite easily. Hence, while cognizant of BCA’s strengths, we are cautious in watching the situation develop, which could potentially develop into a negative for BCA over the medium term.