Banking: State banks will shine - Mandiri Sekuritas

Commercial banks closed the year 2010 with loan growth of 22.8% yoy (vs 10.0% yoy). While we noticed that the market share of loans for state banks has declined at the benefit of private banks, we expect it to rebound this year post recent rights issue carried out by two state banks. Furthermore, we also noticed significant improvement in the state banks’ asset quality, thus justifying our preference to put state banks in our buy list. We maintained our neutral stance on the sector and choose BBRI and BBNI as our top picks.

State banks posted lower loan growth in 2010.. Commercial banks closed the year 2010 with total loans of Rp1,766 trillion, or increased by 22.8% yoy. Loans recorded by private banks grew higher than that recorded by state banks (+29.8% yoy vs 18.0% yoy), thus pushing the market share of loans for private banks up from 41.1% at end 2009 to 43.5% at end 2010. This was in contrast to the market share of loans provided by state bank loans which fell from 37.9% to 36.4%,. It's actually not surprising to see that state-owned bank s' loan growth was lower because their CARs were relatively lower than private lenders. Throughout 2010, state banks’ CARs ranged between 13% - 15% compared with 15-17% for private banks.

.. yet better asset quality was recorded. NPL for state banks posted a significant improvement from 3.5% at end 2009 to 2.8% at end 2010, while private banks’ NPL only declined from 2.8% at end 2009 to 2.4% at end 2010. We viewed this development positively as we in fact saw improved risk management and better loan acquisition process occured in state banks for the past three years.

Ample liquidity remains. It is also interesting to note that deposits grew very strong during the year by 18.5% yoy, the highest growth for the past 10 years. Private banks posted higher growth in deposits of 24.9% yoy vs 18.8% yoy for state banks, making the market share of deposits for private banks to increase from 39.6% to 41.7%. This reflected the aggressiveness of private banks in acquring deposits from the market to support its aggressive loan growth throughout the year.

Better CAR, better loan growth. We are expecting higher loan growth for state banks this year as two large state banks have just completed their rights issue raising total fresh funds of Rp22.1 trillion. Moreover, these banks’ LDRs are still below 78% required by BI, making aggressive loan growth plausible this year. Coupled with further improvement in asset quality, we prefer to choose state banks as our top picks. That said, we maintained our buy recommendation on BBRI and BBNI.