anking: Limited surprises in 1Q11 results - Mandiri

Most of banks under our coverage reported in line PPOP, except for BDMN and PNBN. We also noticed trend of declining NIM despite low interest rate environment, which will likely continue in the forthcoming quarters as liquidity might continue to tighten. We thus maintain our neutral stance on the sector with BBNI as the only banks left in our buy list.

Narrowing NIM. As expected, BI’s recent measure to increase Reserve Requirement (RR) from 5% to 8% has tightened liquidity in the sector. For some banks with high LDR ratio, offering higher TD rates would be inevitable which will lead to a higher cost of funds. Meanwhile, higher placement in RR also led to a lower Earning Assets (EA) proportion to total assets thus lower yield on EA. Coupled with lower loan yield as a result of tighter competition in the sector, NIM ended lower in 1Q11 compared with the previous quarter. The highest NIM contraction experienced by PNBN of 60 bps followed by BDMN of 50 bps.

In line PPOP. Large banks' PPOP mostly came in line with our expectation. Banks that failed to meet our expectations were PNBN and BDMN, which might indicate the pressures they face amid tightening liquidity environment. With such results, we maintained our forecast for all large banks, with a downgrade in PNBN and BDMN’s earning forecast is very likely.

No significant impact from PSAK 50/55 implementation. We have yet seen significant impact on the PSAK 50/55 implementation to the bottom line, except for BBRI which has been lagged in implementing effective interest rate on its micro loans. There hasn’t much change either in terms of impairment/provisioning allocation, except for BBCA which has already recognized provision for unused loan facilities since last year. Other banks will likely follow in the next quarter. However, some banks argued that their unused loan facilities are basically uncommitted credit line, hence no need to provide such provisioning in advance.

Except for BBNI, other banks’ valuations are already rich. Except for BBNI, other banks have already reached or been close to our TPs. Consequently, we only have BBNI in our buy list. Unless we are rolling into 2012 valuation, we believe the valuation for other banks have been priced in at the current prices, with possible downgrade for PNBN and BDMN.