Sector Flash Banking Update - Bahana

New benchmark on yields of government variable bonds
§ Our recent meeting with Bank Indonesia and the Ministry of Finance revealed that the benchmark rate for the government variable recap bonds will now be tied to the 3-month T-Bills from the 3-month SBI (Certificates of Bank Indonesia) rate previously. Reference to SBI is no longer possible as SBI auctions have ceased since October 2010.

§ It is worth noting that the last SBI rate was priced at 6.36% while the T-Bills rate currently stands at only 5.19%. This suggests negative spread of 1.17%, translating to loss of incomes for banks holding variable bonds.

§ However, most banks are in the process of rejecting this move by the central bank as reference to T-Bills will pressure yields on government bonds owned Indonesian banks.

Outlook
The use of T-Bills as the new benchmark rate will be unfavorably for banks carrying government variable bonds. Amongst banks under our coverage, Bank Mandiri (BMRI) would suffer the most as it is highly exposed to variable bonds, accounting for approximately 97% of its government bond holdings, equivalent to nearly IDR80t. This is followed by Bank Negara Indonesia’s (BBNI) IDR15.9t (49% of total government bonds) and Bank Central Asia’s (BBCA) IDR15.7t (39%). Meanwhile, variable bond exposures in other banks amount to less than IDR5.0t (exhibit 5).

Recommendation and valuation
Our back of the envelope calculation suggests that banks’ lower interest incomes from government bonds would result in the following net earnings downgrades: BMRI (-4.7%), BBNI (-2.2%), BBTN (2.1%), BBCA (-1.2%), BDMN (-0.9%) and BBRI (-0.2%). However, the impact towards BVPS is less significant (ranging from 0bps – 50bps), allowing our BUY ratings for BBNI and BMRI to remain intact. This coupled with continued inflationary pressure in 1H11 has us reiterating our NEUTRAL view on the sector.