Macquarie Indonesian banks Capital raisings: Necessary?

Capital raisings: Necessary?
Event
We conduct a simple analysis to determine whether the Indonesian banks are likely to undertake capital raisings under various scenarios.

Impact
Three banks have indicated capital raisings. Despite the regulatory CAR requirement of 8%, three Indonesian banks under our coverage: Danamon (BDMN IJ, Rp2,275, N, TP: Rp2,750), BNI (BBNI IJ, Rp750, OP, TP: Rp970) and Bank Rakyat Indonesia (BBRI IJ, Rp4,350, OP, TP: Rp5,700) have indicated capital-raising plans. We believe these banks are likely to tap the market early both to maintain flexibility and sustain growth over the medium term without having to worry about capital. Indonesia’s banks on average are well capitalised at around 14.3% CAR. Their equity to assets stand at 9.6x, which is relatively high vs banks in other markets.
Scenario analysis of CARs: We test three scenarios to see whether Indonesian banks are likely to raise capital.
Solid CAR at 15%, NPLs rise by 3ppt for all banks and they maintain coverage ratios, NPLs rise by 5ppt and coverage ratios stay at 100%
Asia Pacific capital raisings: More than 20 banks in Asia raised capital in the past 12 months, attracting more than US$65.9bn. We believe that demonstrating strong capital is a way to reinforce investor confidence as long as the primary purpose is prudent policy and preservation of stability.
Some relief from risk-weighted asset (RWA) changes. To support economic growth, the central bank has implemented regulations covering micro lending (loans below US$45k). The RWA for KUR (government sponsored microlending)has been cut to 20% from 50% while the RWA for other micro loans has been cut from 100% to 20–85% (see page 9). Finally, the central bank pushed
back the inclusion of operational risks in the calculation of CAR to June 2011.

Outlook
Most banks need to raise capital. In our view, Indonesian banks need to raise capital to maintain a comfortable 15% CAR. We do not view this as negative as we believe it will provide banks with both flexibility and sustainable growth over the medium term without having to worry about raising further capital. Some banks also have off-balance sheet liabilities (derivatives exposure) that are not included in the CAR calculation.
Cautious view in 1H09; slight U/W vs the market: We maintain our cautious view on the Indonesian banks in 1H09 due to potential surprises on NPLs and strong price performance in the past six months (outperformed the market by 30%). On a top-down view, our strategist has turned to a slight Underweight on the sector. We maintain our top picks in the banking sector, BRI and BNI. We also recommend accumulating defensive bank BCA.