Indonesian Banks - Foreign Ownership: Stocks Down From Peak but Still Well Owned - Citigroup

 Post Oct 2010 Sell-off — The sell-off in Indonesia banks since the Oct 2010 peak (both ownership and multiples) has led to de-rating from peak to near-mean multiples. Foreign ownership as a percentage of free float has declined for all banks, with the highest selling by foreigners (relative) in BBTN and the lowest in
BDMN. Overall, Indonesia banks still remain relatively well owned by foreign investors, particularly BBCA (BBCA.JK; Rp5,950; 1L), BBRI (BBRI.JK; Rp4,925; 2L) and BDMN (BDMN.JK; Rp6,050; 3H).

 Value emerging, but short-term inflation a concern — Valuations appear more compelling now, but inflation concerns are likely to keep stocks flat in the near term. Bank Indonesia’s rate hike has given the market some confidence, but we expect investors to wait and assess the impact of fuel subsidy elimination (scheduled for March; initial impact of 0.2ppt). Our economists have raised their 2011 SBI rate hike forecast from 75bps to 100bps (7.5% by Dec 2011E). Our Buy ratings on BMRI and BBCA are based on the positive sensitivity of their earnings to rising rates.

 Compared with 2008, banks much better owned — In 2008 banks witnessed selling by foreign investors, triggered by peak multiples/inflation and exacerbated by a global crisis. Multiples declined to -2std (based on a bull-market mean of 2006 to date). BBNI and BDMN saw the largest sell-off at the time, and BBCA the least. Heavy foreign buying since then means that despite the current sell-off, foreign ownership is still considerably higher than 2008 lows, except for BBCA.

 Rights placement impact — We estimate that foreign ownership in BMRI will decline to 71% of the free float, based on the assumption that 60% of government share placement will be allocated to local investors (as was the case in BBNI).