Indonesia banks Sector, Strongest to prevail, Credit Suisse

Weak sentiment, good timing. Currently, the sentiment on Indonesian bank

stocks appears soft—even for the large banks. Large banks’ variable rate

marketable security holdings during the current low government bond yield

environment suggest that 1Q12 results may be weak. For large banks, we

expect their 2H12 earnings to be stronger than 1H12’s, as we believe current

government bond yields may not be sustainable given: (1) inflation may have

troughed and (2) the current level of government bond yields reflects the

abnormal, yet temporary, demand after Indonesia was upgraded to investment

grade. Thus, we advise long-term investors to accumulate large banks.

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Size does matter. The decline in time deposit rates has lagged the policy

rate, while the gap between lending and policy rates remains relatively

stable, suggesting increasing competition in the time deposit market. The

CASA market is dominated by the four largest banks, with a combined 55%

market share, leaving mid-sized and smaller banks to rely on liquidity from

time deposits and exposed to the risk of higher cost of funds ahead. We

believe the four largest banks will fare better than the rest in the Indonesian

banking sector.

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Prefer the largest four. We maintain our OUTPERFORM ratings on BMRI,

BBNI and BBRI, and upgrade BBCA from Neutral to OUTPERFORM. We

maintain our NEUTRAL ratings on BDMN and BBTN, and downgrade BTPN

and BJBR from Outperform to NEUTRAL.