Profit taking mode on Indo banks? - JP Morgan

* Sales call – Profit taking mode on Indonesian banks? Sin Beng Ong (economist) flags that foreign holdings in Indonesia's government bonds (SUNs – Surat Utang Negara) rose to another all-time high of IDR 211.6 trillion in March. There are good reasons why the monetary authorities would prefer to reduce foreign participation in the SBI instrument. The central bank may again consider further measures to slow foreign participation in the SBIs. Some of this discomfort maybe hinted at in the statement following the policy meeting on April 12. Further RR hike in Indo banks coming up?

Separately, Sunil Garg (head of bank sector research) thumped the table with his buy call on HSBC today “Buy in May and go away”, showing attractive valuation of 9x 2012E P/E, 1.1x P/B, for 14% ROE. Now I can see why Sunil is lukewarm (at best) on Indo banks, as most of Indo bank stocks will arguably look less attractive than HSBC on P/E, P/E-to-growth, and P/B. BBRI came closest post the recent EPS upgrade by analysts, even then there remains considerable doubt over the direction of FY11 EPS growth.

Indonesia: Foreign SBI holdings up in March- watching BI (Sin Beng)
Foreign holdings in Indonesia's government bonds (SUNs – Surat Utang Negara) rose to another all-time high of IDR 211.6 trillion in March (31.4% of total tradable government securities outstanding) from IDR195 trillion in January. This marks an increase of IDR16.6 tn since January, slightly below the run-rate over the same period in 2010 of IDR17.4 tn.

Perhaps more importantly, foreign holdings of central bank paper (SBIs – Sertifikat Bank Indonesia) also rose in March to reach IDR77.4 trillion from IDR45 trillion in January, accounting for 33.6% of the total. This increase is up a relatively large IDR32.4 tn from January and almost double the increase in foreign holdings of the SUNs over the same period (first chart).

While there has been a very clear shift to reduce the volume of sterilization done through the SBIs since mid-2010 - accounting for 55.7% of all OMO in February from around 100% in 8 2010 – and also extending the duration of the SBI’s that it issues, these changes have not ostensibly had the desired outcome of reducing foreign participation in the SBIs (second chart).

There are good reasons why the monetary authorities would prefer to reduce foreign participation in the SBI instrument. First, foreign participation in the SBIs tends to be volatile and this has translated into periods of FX volatility which complicates monetary policy for the central bank and often much more volatile than foreign bond holdings. Second, foreigners currently hold around 30% of total SBIs, this also has implications for sterilization costs.

Given the recent rise in the foreign holdings of SBIs, which are now back up close to the highs seen in April 2010, the central bank may again consider further measures to slow foreign participation in the SBIs (as occurred in mid-2010) in an effort to reduce the potential disruption to the FX markets from large shifts in foreign holdings of the SBIs. Some of this discomfort maybe hinted at in the statement following the policy meeting on April 12.