Financials Focus - Coming back to Indonesia - Macquarie Research

􀂃 Several weeks back, I elevated Indonesia among our preferred banking markets in Asia. This reversed the call we made at the tail-end of 2010 and at the start of 2011 when Indonesia was among the cellar dwellers in the region.
􀂃 The thinking behind this move was straightforward: valuations weren’t as demanding compared to a few months back, and Bank Indonesia appeared to be more cognizant of inflation. If recent share price performance is any indication, the market seems to concur.

Ten things we like about Indonesia banks
􀂃 Our reasons for liking Indonesia banks (in no particular order) are as follows:
⇒ Low rate environment. Despite the expected rate hikes, the policy rate remains at historically low levels.
⇒ Loan penetration remains low. Loan to GDP stands at 27.8% – still the lowest in Asia.
⇒ Better affordability. The government aims to hike civil servants’ wages by at least 15% in April 2011 and minimum wages by 10-15%.
⇒ Investments are kicking in. Investment to GDP was 32.2% in 2010. This ratio is at an all-time high.
⇒ Solid consumption story. Motor vehicle and motorcycle sales have been trending upward post the GFC on the back of low interest rates and higher affordability.
⇒ Favourable macro outlook. Indonesia is the only country in Asia that we expect to see faster GDP growth in 2011 with a 6.5% rate.
⇒ Sovereign rating upgrade. Indonesia is one level below investment grade under Fitch & Moody’s, while S&P has a positive outlook.
⇒ Strong loan growth outlook. The recently concluded rights issues by several banks should lead to stronger loan growth.
⇒ High margins. NIMs are known to be the highest in Asia, though more importantly, the expected rate hikes suggests scope for this to increase.
⇒ P/BV is not expensive relative to its returns. PER is in line with the rest of the market, with growth being driven by quality earnings, in our view.

Stock ideas
􀂃 We like banks that should fare well in a rising rate environment. Ferry Wong,
our Indonesia HoR & banks analyst, cites BCA, Mandiri and BNI.
􀂃 My personal favourites are BNI and BTPN. On BNI, not only do we think it
screens well in a rising rate environment but it’s also the cheapest bank in
Indonesia. It’s also less known in our view, and has lagged a bit. However,
we believe it may finally live up to its billing as the next Mandiri, ie, a
turnaround, restructuring story.
􀂃 On BTPN, I like it because of its high ROAs. Where else can one find a bank
in Asia flagging for a rising sustainable return of 4.4%!