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Senin, 12 September 2011

Indonesian Strategy: Alert: FasBI Rate Cut Will Be Positive For The Market - Citigroup

FasBI rate cut from 5.75% to 5.25%. The Central Bank has widened the lower band of the interest rate corridor for monetary operations from 100bps to 150bps below the BI rate. Banks will now earn 5.25% on placement of overnight liquidity with Bank Indonesia (the overnight borrowing rate is unchanged at 7.75%).

Central banks signal more rate cuts; Cut our interest rate assumption by 25bps. In the policy statement, BI added some cautiousness on the growth outlook, saying that the global downturn will be felt in Indonesia’s export and may slow down growth. It also became more dovish on inflation amid lower commodity prices, and signaled using
both interest rates and macroprudential measures to respond to these conditions. We believe this is an indication for a rate cut by the central bank of the policy rate. As such, our Indonesia economist, Helmi Arman, has cut his policy rate assumption to 6.5% for both 2011 and 2012 (from 6.75% previously).

Government bond yield fell to 6.5%, down 360bp in the past 20 months. The decline in FasBI rate would allow money market rates to fall down further. Post announcement, the government’s bond yield declined further to 6.5% from 6.75%. The bond yield has come down from 10.1% at the beginning of 2010 to 6.5% currently.

Short-term negative on the bank but good medium- to longer-term, higher loan growth expected. The immediate impact on banks’ earnings will be negative due to lower interest income, but medium-term it will mean higher loan growth and banks with higher deposit franchise could easily cut their cost of funds by lower rates i.e. BCA, Mandiri, and BRI. Our banking analyst, Salman Ali, has his top sector picks as Bank Mandiri and Bank Rakyat.

Corporate cost of funds could decline further. Government bond yield has declined 360bps in the past twenty months but corporate bonds have declined by 100-150bps only. We believe this, and an upgrade in sovereign risk rating to investment grade, means that corporate bond yield and borrowing cost could fall by another 100-200bp.

Positive for the market, buy banks, auto, property, cement and infrastructure. The lower interest rate environment will bode well for economic growth, loan growth (especially for consumption and infrastructure story), and the Indonesia consumption story. We expect car and motorcycle volumes to remain strong, supported by wide availability of financing. In terms of top picks, we remain buyers of Bank Mandiri, Bank Rakyat, United Tractor, Indocement, and Jasa Marga.

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