Deutsche Bank BBCA Gaining importance as Indonesia's transactional bank

Gaining strength in deposit franchise; Rp7,675 target price, Buy
We reiterate BCA as one of our top picks in the Indonesian banking sector. Its deposit franchise will likely become increasingly important in 2011, particularly under tight lending competition. Of late, BCA's deposit franchise has gained strength, leading to rising CASA shares and a historically low COF. The bank's gain
has been fueled primarily by increasing cashless transactions through its electronic channels – strengthening its status as a transactional bank of choice, despite the declining market shares of physical distribution channels.

Gain in CASA shares through increased transaction activities
Since 2006, BCA has gained 180bps in CASA market share, reaching 17.5% in 9M10. We believe BCA’s gain reflects the bank’s growing importance as Indonesia’s transactional bank of choice. Indeed, cashless transactions through its Internet banking platform now account for 63% of BCA’s total transaction values
(ex. branch-banking) – a significant jump from 32% in 1Q06. The increased CASA share has helped BCA in bringing down its COF to 2.7% – a record low for Indonesian banks. This gain also comes cheap, given BCA’s gradual decline in ATM and branch market shares, allowing it to keep a manageable CIR.

Deposit-funded loan growth (2006-9M10)
BCA’s deposit franchise quality helps “self-fund” its loan growth. Since 2006, its deposit growth of Rp110tr has far outstripped accumulated loan growth of Rp77tr – implying an incremental LDR of 70%. This is in contrast to the industry profile, where incremental LDR is at 100%. Hence, the bank has the most excess liquidity.

Rp7,675 target price; risks: lower asset yields, loan growth; higher COF/opex
Our target price is derived from the Gordon Growth model (see inside for details). Risks are operational breakdown, lower yields and loan growth, and higher opex.