Indonesian Banks - 1QFY11 Results Wrap: Patchy Profits, Micro Plays Stand Out - JP Morgan

• Ex BBRI & BMRI, sector profits grew 12.6% y/y in 1Q: 3 Banks under our coverage, BBRI, BMRI & BDMN, declared 1Q results today, bringing 1Q results season to a close. Overall 1Q net profits were colored by BMRI (1Q recoveries) & BBRI (4QFY10/1QFY11 accounting change). Excluding these two banks, aggregate sector profits grew by 12.6% y/y. We see these as generally below par with sector (ex BBRI/BMRI) 1Q profits at just 22.5% of FY11E consensus.

• Lending & asset quality healthy, costs and margins the source of pressure: Our sense from looking at results is that while credit momentum was generally healthy, costs and margins (in some cases) were the pressure points in 1Q. We expect cost and margin pressures to continue and expect that results should precipitate downward earnings revisions to sector earnings.

• Results support our preference for micro lenders: Apart from BMRI (where recoveries offset margin compression) BBRI, BTPN and BBKP all grew earnings by >45% y/y. This supplements our thesis that the market is undervaluing micro lending franchises relative to the rest of the sector (see “Industry margins moving lower in 1Q: Micro franchises offer best value”, 26 April 2011).We continue to see this as an opportunity, and our top sector pick remains BBRI.