Strong provincial banks' profitability metrics underscore underpenetrated market - CLSA

Our bank analyst Bret Ginesky is looking at regional bank IPO pipeline. Following the step taken by regional bank Bank Jabar (BJBR IJ), some regional banks are likely to follow through with IPOs.

Bank Jatim (Bank of East Java) is scheduled to offer shares to the public this year, with seven others planning for IPO in 2011 or 2012.

What is very interesting is the solid profitability metrics from ROE and ROA perspective. Average ROE and ROA in 2010 for these regional banks are 31% and 2.9% respectively. Credit quality is also pristine with NPLs under 2%. High CASA ratios are also common. Bank Papua, for example, has 90% CASA and 43% LDR!

The data underscores the attractiveness of the banking sector in Indonesia. Structurally, Indonesia is a very underpenetrated market for banking sector.

Indo consumer credit to GDP is only 8% and loan/GDP is 26%, one of lowest in the world. Only 25% of the population has a bank account. Demographics further favor Indonesia growth in credit, fees and general banking.

Indo banking sector is in the frontline to benefit from hockey stick J-curve growth in middle class in Indonesia. About 45% of the population in Indonesia is < 25 yrs old. Demographics and an increasing proportion of middle-income families will be important drivers for the sector over the next decade in Indonesia.

The proportion of middle and upper middle class households will increase from 30% currently to 40% next year. There will be nearly 100mn middle class people in 2012, four times the population of Australia. More than 60% of the Indonesian population will be urbanized by 2012.

Demand growth in many sectors, such as financial service, is likely to be exponential, as average per-capita disposable income approaches the critical US$3,000 level.

Our top picks in the banking sector are Bank Mandiri (BMRI IJ) and BNI (BBNI IJ).