CLSA INDO Banking Sector – risk aversion continues

Research Today: banking sector – risk aversion continues
Our banking analyst Nico gives an update on the sector. He sees that liquidity continues to build up in the banking system with liquid assets now amounting to 24% of total banking assets. However, banks remain cautious and have not accelerated lending growth. Strong deposit-taking franchise BCA (BBCA IJ) and Bank Rakyat (BBRI) remain top picks in the sector

Deposit rates have proved to be very sticky. However, it appears that the cuts made by Bank Indonesia and Guaranteed Deposit Agency (now at 9%) is slowly making an impact. We heard that deposit rates in money market funds have significantly been lowered (around 9.5%-10% from the previous 12-13%) when customers wanted to roll over their 3M deposits. This will alleviate pressure on NIM.

The other key issue is NPL formation. So far, NPL formation is in line with our analyst expectation (our analyst expects over 5% for the year) but there is room for a positive surprise – especially for BCA and BRI.

Key points from the report:
· Indonesian banks continue to build additional liquidity on their balance sheet with liquid assets accounting for 24% of total assets, up from 21% in Sep 08 and 23% in Dec 08.
· Loans growth continue to decline driven mainly by FX loans.
· Meanwhile, NPL is still on rising trend with March 09 of NPL 4.3%, up from 3.3% in Sep 08.
· The key issue for investors is not so much on higher NPL in 09, but rather on the severity of the new NPL formation.
· Based on NPL assumption for banks under our coverage and comparing to recent data, we believe there is positive surprise for BCA and BRI.