Indonesia Banking Sector : Rising income equality boosting consumer loans - Deutsche Bank

Faster growth outside Java reduces disparity; top picks: BBNI/BMRI/BBCA
This report reiterates our view on Indonesia's rising income equality. Growth outside Jakarta/Java is ahead of the national average, and is translating into higher income increases in those regions. Consequently, future consumer loan growth is likely to be coming from these high growth areas - resulting in long-term competition for fincos. Major credit-driven consumer sectors will benefit from credit availability. Overall, we remain upbeat on the banks' long-term outlook, and see limited near-term earnings risk despite higher oil prices and inflation.

GDP growth: Spreading out of Java
BPS’s latest data suggests a lower Gini coefficient for Indonesia. It is perhaps one of the very few countries with a falling coefficient, indicating falling income disparity. We believe areas outside Java have delivered stronger growth profiles – essentially catching up with Java’s growth (particularly Jakarta areas). As depicted in the two charts on the right hand side, GDP contribution from outside Java rose to 52% in 2010 (from 42% in 2004). This has been fueled by the surging middle class in Indonesia. BPS data estimates about 33m people with a GDP/capita of over US$5,400/annum in 2010 while the remaining 55m of the workforce has GDP/capita of about US$2,400/annum. More importantly, we believe that each of these workers is qualified to obtain bank loans for either a motorcycle and/or a low cost mortgage.

Rising consumer loans outside Java; LT competition risks for some fincos
Consumer loans have been major drivers of loan growth in the past six years, rising to 31% of total loans in 2010 from 27% in 2004 – implying a 6-year CAGR of 24% (vs industry average of 21%). And Indonesia’s rising middle classes will remain primary drivers of future consumer loans. Specifically, given their faster income growth, we expect stronger consumer loan demand from outside Java – as has been seen in the past six years, where both cement per capita consumption and auto registrations are catching up. While the consumer loan portion from areas outside Java rose to 30% of total consumer loans in 2010 (from 27% in 2004), they still have lower loan penetration rates. Further out, we expect competition for consumer loans outside Java to pick up. Major finance companies under Astra International are also looking to expand outside Java. A recent meeting with BCA’s director for consumer loans suggests the bank’s aim is to increase the portion of consumer loans to 30-33% from 2010’s 25%.

LT overweight Indonesia banking sector; risks: macro and competition risks
Our top picks in the banking sector remain BBNI/BMRI/BBCA, given their more competitive COF and excess liquidity. We have derived these target prices based on Gordon Growth Models. Risks to the sector are macroeconomic risks (e.g. currency stability and rising inflation), as well as regulatory and competition risks.