Indonesian banking sector, currency kick - CLSA

ret Ginesky has just written a note on Indo banking sector. He looks at how a stronger rupiah should drive profits higher at the Indonesian banks. Historically, an appreciating rupiah implies stronger loan growth in the system. Confidence is key as Indonesia is likely going to have to rely more on outside capital going forward.

Loan growth is expected to be around 23% in 2010 and 25% for 11 CL. While it looks high, Indonesia still has a very small loan penetration at about 26% to GDP. In the past 5 years, average loan growth is 19-20% and it did not lead into serious inflation. The economy is re-leveraging from a very low base.

The challenge is that LDR will move to 85% by YE2011 from previously 75%. While banks are very well capitalized, it is certainly going to get tighter soon. Deposit growth in the past 5 years is around 14-15% average p.a, significantly below the loan growth. Indonesia is going to rely more on outside capital in the next few years. In this regard, confidence is essential.

Other key points from the report:
· Loan growth of 23% in 2010 and 25% for 11CL, supported by strong deposit generation is tantamount in this environment.
· The historical deleveraging story is waning, NPL improvements will have less impact on future earnings across the system.
· 2010 Rupiah based loan growth was driven by services, commodities, and utilities segments.
· 2011 looks to be supported by the same segments as elevated commodity prices and need for energy drives investment.
· BBRI, BBNI, and BMRI lend to the fastest growing segments in the Indonesian economy