Banking:To face another challenge - Mandiri

Recent announcement of changes in reference rate for VR bonds put commercial banks in another challenge this year after LDR-linked penalty, higher forex RR and Base Lending Rate regulation. We noticed that three banks will be largely affected by this regulation: BMRI, BBNI and BBTN. We still expect further consolidation in the banking sector and maintained BBRI as our top pick.

SPN-3 months was set as the new reference rate for VR bonds. On Friday, 25 Mar11, the government finally decided to use SPN-3 months as the new reference rate for VR bonds, replacing the prevailing SBI-3 months. The first VR bonds to use SPN-3 months are VR18, VR20, VR23, VR26, VR27, VR31 and VR32, whose rate will likely be decided on the next auction day around 19Apr11. Please note that the previous auction on 22 Mar11 resulted in a yield of 5.186%, which was significantly lower than the current SBI rate reference of 6.4%.

…affecting three banks. Exhibit 1 shows that BMRI will be affected much from this new scheme, given the fact that around 97% of the bank’s government bonds was in variable rate. We estimated a decline of 3.7% in the bank’s bottom line should there be a 100 bps drop in the yield for government bonds effective end of Apr11 (8 months effective for FY11). The other banks to suffer are BBTN (-1.4%) and BNI (- 1.2%). Please note, however, that the negative impact to BMRI this year will be minimized by the one-off gain from Garuda Indonesia’s divestment.

Commercial banks’ NPL increased. Meanwhile, commercial banks’ data for Jan11 has just been released. Loans declined by 1.1% mom, with working capital loans posted the largest drop of 2.9% mom, followed by investment loans by 1.8% mom. This is common for commercial banks, whereas loans tended to decline in the 1Q of the year. NPL worsened to 2.8% at end Jan11 from 2.6% at end Dec10 with NPL from consumer loans posted the highest growth of 8.7% mom despite the fact that its loans actually grew by 2.2% mom.

BBRI remains to be our top pick. We expect more consolidation in the banking sector. With the possibility of lower yield on government bonds, banks are required to be more efficient in allocating its earning assets (note that Jan11s NIM for commercial banks declined to 5.6% from 5.7% in previous month). Furthermore, banks are also expected to increase its efficiency to compensate for possible NIM erosion in the future. Among banks under coverage, we maintain BBRI as our top pick, not only because it will be less impacted from the new VR reference rate but also because it will deliver 26.2% upside potential based on our TP.