Resilient earnings profiles; Overweight banks
The Indonesian banking sector has underperformed recently. In part, this reflects concerns over rising inflation, and subsequent expectations of BI rate hikes in 2011. Given that core inflation is hovering at a stable 4.3% (since 4Q2009), we believe the BI rate response should be a manageable one. Given large liquidity at major banks; risks of higher reserves should not derail robust loan growth of 20-25% in 2011F, and have limited earnings implications on Indonesian banks. We reiterate our Overweight with BBNI/BMRI/BBCA as preferred stocks.
Core inflation hovering at 4.3%
There have been growing concerns in the banking sector over the prospect of higher policy rates given rising inflation pressures. While headline inflation is at 6.96% yoy in 2010, overall core inflation stayed at 4.3% – stable since 4Q2009. BI has stated it might start raising rates when core inflation reaches 5.0%. Given the under leverage nature of the economy, we also argue that interest rate hike would be an ineffective measure to contain inflation when drivers of recent inflation have primarily been supply-side disruptions due to weather-related conditions. The government’s planned fuel subsidy removal for private car users in 2011 would only raise CPI by 0.2-0.3%. Non-food prices too are showing slowing price momentum. Consequently, we think this should also translate into a manageable interest rate response from BI of 50-100bps, if any, which would not choke off loan growth. We expect loan growth would remain at 20-25% in 2011-12F.
Resilient earnings
Contrary to market perceptions, we believe that a 50-100bps policy rate hike would not alter banks’ earnings profile. As such, any sell down in the banking stocks should present as buying opportunities. Typically, in gradual rate increases, through ALM, banks can adjust accordingly; and hence minimizing any negative impact arising from higher interest rates. Based on our study, major banks have more floating rate earnings assets than floating rate funding. We reckon changes in the system liquidity would have a more profound implication on banks’ earnings.
Higher reserves requirements offset with ample liquidity
Given BI’s reluctance to hike policy rates, the central bank may choose to further impose higher reserve requirements. At this stage, the industry has still ample liquidity. As of 9M10, the combined total short-term investment (as a proxy of excess liquidity) for five largest banks stands at Rp322tr (accounting for 23% of assets or c.39% of their gross loans). More importantly, approximately 60% of these ST investments are considered to be liquid assets (call money, SBI, and interbank placements). Also, provided there is still access to external financing,
implications on future loan growth from higher reserve would be limited.
Top picks are BBNI/BMRI/BBCA
We derive our target prices based on the Gordon Growth model – see inside for details. Key risks are regulatory changes and macroeconomic downturns.
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