CLSA Banks Sector Outlook

Research Today: Banks sector outlook (by Nico Oentung)

There has been concerns for liquidity in the Indonessian banking system. Nico highlights that indicators point to improvement in overall liquidity in the system. However, deposit rates have been relatively sticky as banks still require high premium for liquidity. Impact will be greater margin pressure for banks with weak funding franchise, while those with safe haven characteristics will benefit from liquidity flows. A lot of negative news is priced in some of these banks. At 1x PB, sales desk like Bank Mandiri.

Key takeways from research:

Liquidity improving
System LDR improved from peak of 78% in Aug 08 to 73% in Dec
Adjusted LDR (including govt. bonds) declined from 95% in Aug 08 to 88% in Dec
SBI outstanding rose by 6.4% m-o-m in Dec and 52% from Sep 08 low

Deposit rates still high
Large banks are still offering 11-12% (foreign banks: 13%) for their 1-mth TD
Negative spread between 1-mth TD and SBI rate implies premium for liquidity
Greater margin pressure for banks with weaker funding franchise such as Danamon

Liquidity concentrated in large safe-haven banks
Mandiri, BRI and BCA benefits from flight-to-safety and strong deposit franchise
Their combined LDR stood at 68% as of 3Q08 vs. 81% for rest of the sector
About two-thirds of deposit base are in the form of low cost and “sticky” current account and savings

Maintain O-PF on BCA and BRI; Sell Danamon