CIMB Indo Bank

• Early stage of NPL cycle. We do not expect the full NPL hit to be reflected yet in 4Q08 results. Conversely, some banks might even raise their provisioning coverage on successful estructuring. Despite stable industry NPL ratios of around 3.5%, NPLs in absolute amounts have started to rise. In Sep-Nov 08, NPLs rose 12% to Rp46tr, indicating an early stage of the NPL cycle. We believe NPL ratios will escalate very soon, exacerbated by slow loan growth (denominator in the ratio) in 1Q-2Q09. The central bank’s extended requirements for loan grading that incorporate debtors’ business outlook and financial conditions, including the oneobligor concept, will put more pressure on NPLs. Bankers are seeking to renegotiate these terms with the central bank, in hopes of alleviating the indirect NPL shock.
• Liquidity disparity. A series of indicators is suggesting that liquidity has started to ease. Deposit growth has outpaced loan growth in the past few months, contrary to the trend in the first eight months of 2008. The SBI rate has come down quite sharply, closing the gap with the BI rate, on much lower SBI issuance. Nevertheless, some risks remain in the system, as the liquidity disparity appears to be widening. Most big banks have secured enough liquidity, some even more than needed, but small banks are still struggling for deposits. Statistics show that the top
10 banks (out of 126 in Indonesia) have captured two-thirds of industry deposits. Interbank mechanisms have not done much to help, without guarantees on counterparty risks. The donward repricing of deposits could get much slower, creating a lengthier lag for lending-rate repricing.
• Capital constraints. Several years of continuous high loan growth have consumed most banks’ capital adequacy ratios. Industry CAR dropped from 21.3% at Dec 06 to 16.8% at Nov 08, though still well above the 8% requirement. Based on banks’ simulation, the introduction of operational risks in CAR calculations could consume CAR by another 1-3%. Implementation is aimed at 2009-10, but could be postponed by the economic downturn. While banks could fortify their capital by issuing subordinated loans or rights or cutting dividends, some banks could opt to lower their loan growth in these 1-2 years before they are able to get new capital. The latter would be a better option given the current difficulties of raising capital. Fortunately, state banks channelling Kredit Usaha Rakyat (KUR) loans, especially BRI, are gaining more space as the BI cuts the KUR risk weighting to 20% from 85%.
• Maintain Neutral. We have yet to turn positive on the sector, despite lower BI rates. A potential NPL spike is another test for banks, before valuations can be re-rated meaningfully, in our view. State banks have become more appealing on support from the government and SOEs, which reinforces our selection of Mandiri and BRI as top picks. No changes in our forecasts and target prices.