Indonesia Banks: Upgrade to Attractive - Morgan Stanley

What's Changed
Industry View: Indonesia Banks
In-Line to Attractive
BBRI.JK From Rp7,200 to Rp7,700
BBCA.JK From Rp6,116 to Rp7,000
BDMN.JK From Rp5,000 to Rp5,700

We upgrade Indonesian Banks to Attractive: High returns, strong GDP growth and an underpenetrated market make Indonesian banks attractive in a regional context, in our view. They should maintain above regional-industry growth, yet trade in line on 2012e P/E. In our defensive regional banks portfolio, we think Indonesia is one of the best ways to buy growth.

Morgan Stanley's ASEAN economist identifies infrastructure spend as key: Our ASEAN economist, Deyi Tan, estimates future infrastructure investment could lift GDP growth to 7.2% by 2015 (8% in the bull case). We believe this could be a driver of stronger loan growth. To reflect this view, we assign a 35% probability to our bull-case valuation outcome (which assumes 25% loan CAGR), 60% to our base case (20% loan CAGR) and 5% to our bear case (15% loan CAGR). Previously, we assigned a 100% probability to our base case. The revised methodology leads us to raise our price targets.

Catalysts and risks: Although we expect inflation pressures to accelerate in 4Q11, easing near-term pressures because of better food and oil comparatives should help sentiment for now. The stocks should also benefit from the rollover of valuation metrics to 2012e as we get closer to year-end. We see the main areas of earnings risk as increased NIM pressure as the change in reference rates on government bonds affects near-term asset yields and rising NPLs in SME books.

BRI most preferred, Danamon least: Our favoured stocks are BRI (attractive valuations and high returns) and Mandiri (attractive valuation and improving business franchise). Danamon remains most vulnerable to increased funding pressures, in our view.