Indonesia Banks: US Marketing Feedback – Inflation and Valuations - Citigroup

 Selective exposure — Our marketing theme was that Indonesia banks’ medium-term growth prospects were strong, but valuations were expensive (ranging from +0.4 to +2std). We recommended during our marketing trip selective exposure through Bank Mandiri (our Top Pick) and Bank Rakyat (recently upgraded to Buy) on a 12-month view. Our Top Sell was Bank Central Asia (expensive valuations), while maintaining Sells on Bank Negara and Bank Danamon.

 Key takeaway(s) — Inflation and valuations were the main investor concerns. They agreed that inflation has eased recently, but risks of a second wave remain. Sustainability of high ROAs was also questioned, due to declining loan yields.

 BBCA: Pushback on Sell call — Investors argued that Bank Central Asia (BBCA) has a strong franchise, low LDR and historically high valuations. Our argument was that the stock is trading +2std above its mean and regulatory changes were squeezing NIMs (restrictions on SBIs plus risks of lower returns on deposits with BI). Management’s decision to cut deposit rates (savings by 25bps) may lead to better NIM and LDR, but at the expense of earning assets growth.

 BBRI: Mixed views on Buy call — Some investors were skeptical on Bank Rakyat (BBRI) due to its high LDR, low CAR and deteriorating asset quality in a favorable environment. Some found its valuations attractive on P/E. Next trigger would be 1Q11 results to assess interest income and asset quality trends, expected on April 29. Consensus 2011E EPS has been raised 12% since Feb 2011.

 BMRI (Buy) and BBNI (Sell): No major pushback — We highlighted that our Sell on Bank Negara (BBNI) was due to its expensive valuations and weak operating performance. Restructuring appears priced in as current BBNI forward multiples are higher than Mandiri’s (BMRI) average in 2006-07 (restructuring phase).

 Bond yields to remain range-bound — Our economist, Johanna Chua, had a separate US marketing trip meeting Fixed Income clients. She felt: “Investors are getting bit cautious about bond yields following the recent price rally, and we've seen some profit-taking, but the overall underlying view on the country remains positive. Real money indexed investors are neutral on Indonesia and still seeing
net inflows in LCY bond funds, so we expect any pullback on IDR bonds to be shallow given offshore demand. The bias of US accounts is to stay shorter duration, up to 5yrs for carry. However, some short tenor yields have gotten very low, such that local demand is very limited given that yields are below cost of funds of local banks. Thus, the main driver of this market will be continued offshore inflows to play on the currency. This is fine in the near-term while inflation is manageable, but we expect it to become more vulnerable when inflation risks rise by mid-year. Thus, we would prefer the longer end (20yr paper) when yields cross the 9.25% range.”