Indonesian bank, Sector Outook, CLSA

Manageable risk
Regulatory risks have overshadowed the Indonesian banks. While Bank
Indonesia (BI) has discussed measures on normalizing spreads, we
believe implementation will be challenging. During our talks with BI, it
became clear that their goal is to create higher efficiency in the banking
system. Intensive discussions between BI and banks are being carried
out and we expect banks to have time and room to maintain profitability.
We maintain our view that contraction in margins will be minimal and
reiterate our BUY call on BBRI.

Lower spreads, not lower profitability
 Even though BI considers loan rates too high, BI is not seeking to limit profitability
(ROA) of banks.
 Spread will decline for Indo banks in the future, but this will be driven by lower
overhead costs and lower risk premiums.
 NIMs may decline, but this will be offset by lower operating expenses. Thus
profitability will likely be maintained.
Implementation remains challenging
 BI has carried out intensive discussions with Indo banks, scrutinizing their business
plans. A quarterly meeting is conducted to monitor their progress.
 A regulated lending rate will be challenging because Indo banks have different
structure and are in different stages of their business cycle.
 Only large banks will be able to absorb the losses if the central bank imposes a cap
on lending rates, because these banks have sufficient economies of scale.
Limited NIM contraction
 We maintain our view that NIM contraction of up to 40bps is likely, mainly driven
by competition and lower yields on earning assets (due to lower BI rates).
 A further 25bps NIM squeeze (most likely downside case) sees EPS fall by ~5-13%.
 We also expect banks to be able to increase fee based income and improve
efficiency to maintain strong profitability.
Regulatory overhang to remain
 Regulatory overhang will likely remain as negative news keeps flooding the market.
This has created negative sentiment in the sector.
 We maintain our buy call on BBRI. We believe BBRI will be one of the survivors due
to its strong micro franchise.
 BBNI is our second top pick because of its current attractive valuation, while BMRI
will have its NIMs contract more than expected because of recent low bond yields.

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