Indonesia Banks, Reserve Requirement Hike: Ample liquidity but Opportunity Cost, Citi

 Bottom-line impact of 2-3% — Bank Indonesia’s (BI) intention to use higher Reserve
Requirment (RR) to combat inflation looks to reduce large banks’ profits by 2-3%
(annualized). Rate hikes on the other hand, favor large, liquid banks. The impact
assumes 300bps hike (same as in Nov 2010) with zero payment. This is the worst case
scenario as BI opted to pay 2.5% on the 300bps increase of Nov 10 (remaining 5% of
Primary Reserves @ 0%). January-end local currency deposits are Rp2319trn and, if
BI does opt for +3% @ 0%, will absorb liquidity of Rp70trn and save BI Rp2.1trn.


 Interest Rate was the preferred tool till 2010 —Primary Reserve Requirment was
unchanged at 5% from Asian Crisis till Nov 10 (raised to 8%). Jakarta Financial Index
declined 3% in one month after Primary Reserve increase and 10% over the next
3M. Secondary Reserve (in the form of securities) of 2.5% has been imposed since Oct
09. Other changes in reserves (based on asset size and LDR) have been used to deincentivize
banks from buying SBIs/Term Deposits.

 BI policy mix aims at high, targeted loan Growth — Interpreting signals from Bank
Indonesia, it wants 1) loan growth to remain above 20% with higher contribution from
business loans, 2) lending rates to be on a declining trajectory, 3) reduce BI’s monetary
policy management cost and 4) maintain interest/exchange rate stability. For this, 1)
both FasBI and max. deposit rates have been cut, 2) a higher downpayment for auto
loans is being imposed and 3) the intended increase in RR. Business loan growth is
currently 25% while consumer has slowed down to 21%. Rp loan growth has been
stable in the 20-23% range. Our positive view on banks is based on GDP growth
sustaining above 6% and inflation peaking at a manageable 7%.

 Banks have ample liquidity — Placements with BI were Rp509trn (Dec end),
sufficient to meet higher RR and fund 20% loan growth. Opportunity cost for banks of
higher RR will be c~ 4% (current TD rate with BI). Among banks under our coverage,
BBNI’s earning is the most sensitive to changes (due to its higher cost base).

Download file : Citigroup Indonesia Banks-RR hike