Indonesian Banks, Possible tightening, CLSA

Bank Indonesia is considering increasing the reserve requirement (RR)
for Indo banks in response to high inflationary pressure from the planned
fuel price hike. This is an Indonesian-specific issue as other countries in
the region are easing instead of tightening. We estimate minimal impact
from a 100 bps increase in RR for banks under CLSA coverage due to the
current excess liquidity and low yield from FASBI. Moreover, the system’s
liquidity is still abundant. We maintain our BUY call on BBRI and BBNI.


Bank Indonesia is discussing a possible increase in Indonesia’s RR
 To contain inflationary pressure from the scheduled subsidized fuel price increase in
April 2012, Bank Indonesia (BI) is considering increasing the RR for banks.
 BI is forecasting inflation of 4.5% +/- 1%. This already includes the possible 70bps
increase to inflation if the government limits the fuel subsidy.
 In a board meeting last week, BI decided to keep its policy rate unchanged, which
was subsequently followed by a 50bps cut in the deposit guarantee (LPS) rate.

Indonesia is in tightening mode…
 Since early March11, commercial banks have had to adhere to an 8% RR for both
Rupiah and foreign exchange deposits.
 However liquidity in the system remains abundant, with open market operations
reaching Rp461tn as of March 2012.
 Assuming a 100 bps increase in the RR, liquidity in the Indonesian banking system
will contract by around Rp28tn.

...while India and China are in easing mode
 In contrast to Indonesia, India and China have recently cut their RR.
 India cut its cash reserve ratio by 75bps last week to 4.75%, in line with the low
inflation trend there.
 China cut its RR by 50 bps in February 2012 to 20.5% for big banks and 18.5% for
small banks.

Minimal impact to our covered banks
 The impact will be more severe to small banks rather than large banks. Small
banks have been negatively affected by lower LPS rate and will be affected most if
RR ratio is increased.
 For banks under CLSA coverage, liquidity may contract by Rp14tn, a relatively
insignificant amount compared to the over Rp100tn in excess liquidity.
 We maintain our BUY call on BBRI for its strong profitability and O-PF call on BBNI
for its improved risk management and better performance projected this year.

Download file : Indonesia Banking Sector 140312