Banking Sector Update: 1Q11 Results Round-ups - Some slowdown - Bahana

Still stellar earnings growth, but slowing
Indonesian banks under our coverage reported 1Q11 results, which were slightly above market consensus, but inline with our expectations. Exhibit 2 shows the various banks’ performance sorted by their 1Q11 y-y operating growth from highest to lowest. We note that 1Q11 y-y operating profit growth for the sector slowed to 33.1% from 58.2% in 4Q10. On the bottom line, net earnings growth also decelerated to 39.9% y-y in 1Q11 (from 81.7% y-y in 4Q10) in spite of BMRI’s performance (+88.7% y-y), supported by massive recoveries (including from Garuda worth IDR1.45t), and BBRI (+51.6% y-y) which benefited from the late implementation of PSAK 50 & 55. Stripping these out, the industry would book 1Q11 net earnings growth of around 20% y-y.

Loan growth slowed; Potential further pressure in margins
Loans grew 23.5% y-y (based on eight banks, representing 55% of the total industry’s) and 0.4% q-q due to seasonality. Despite weak q-q loan growth, consumer and micro loans continued trending up. Separately, we have seen pressure in NIM due to higher average funding costs, arising from the 25bp hike in February’s BI rate, particularly for small-mid cap banks, while yields on earnings assets have remained sticky. Margin pressure is likely to persist due to the following rationales:
§ Increased lending competition is inevitable as the market is flushed with liquidity. This reflects the current industry LDR of 73.8% (8 banks under our coverage) and strong inflows in government papers (+24.1% y-y to IDR1,106t). Corporate lending tends to be crowded with alternative and attractive financing via offshore USD borrowings and the capital market through bonds and rights issues. Meanwhile, greater interests in consumer loans are forcing banks to enter the SME/ commercial fray.

§ New benchmark of the government’s variable rate bonds, which is tied to the lower 3-month T-bills, has become unfavorable for banks with high exposure to the bonds, lowering the average yield on their earnings assets. Within our banking universe, BMRI has the biggest impact with total exposure of nearly IDR90t.

§ As we expect BI rate to increase another 25bps in the middle of this year, higher average funding costs will materialize, particularly for mid-small banks with high LDR. In contrast, banks with strong deposit franchises will be better positioned to benefit from sufficient liquidity.

Most have reached our target prices; Stock picks: BBNI & BJBR
We like banks with competitive funding structure (i.e. BBCA, BBNI, and BMRI), allowing loan portfolio remix, which would in turn help to protect margins and ensure continued earnings growth. However, with most banks approaching our target prices, we only have BUY ratings on two banks: BBNI on 2011 P/BV of 2.0x and BJBR (niche market) on 2.3x.