● Indonesia banks have underperformed NJA banks by 9% in the last one month. We see three reasons: (1) Inflation concerns, (2) drag from BNI’s US$1.2 bn rights issue which is being followed by Mandiri’s US$1.5-2.0 bn rights, and (3) stretched valuations.
● The sector may drift down near term as all three reasons are likely to persist. Although inflation has been benign so far this cycle, food inflation is rearing its ugly head again. This time the biggest scare is in India; Indonesia is likely to be relatively benevolent.
● As for overhang, Mandiri rights issue is on its way. And valuations remain some of the most stretched among Asian banks. We had trimmed Indonesian banks to mild-OVERWEIGHT from
OVERWEIGHT in July 2010 due to valuations.
● But Indonesia remains the most attractive bank sector in Asia on a structural basis: Banks earn some of the highest net interest margins in the world and deliver a consistent ~20% earnings growth. We consider Indonesian banks a core holding and expect stock prices to do well once the inflation situation becomes clearer in the next few months. Mandiri and BCA are our top pic ks.
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