Credit Suisse Indonesia Banks Sector

The Indonesian government has asked the country’ banks to lower lending rates. Fulfilling the government’ request may result in lower profitability due to lower net interest margins, particularly given the current threat of higher credit costs. While the Indonesian government is theoretically unable to force banks to lower rates, we believe state-owned rather than private banks are more likely to fulfil the government’ request.

We believe that lowering lending rates may not necessarily translate into higher loan growth as banks remain reluctant to boost loan growth given the threat of lower asset quality.

We are concerned that banks could lower lending rates while simultaneously boosting loan growth given the risks of margin compression and higher credit costs, which may threaten earnings.

If we look at RALS’ sales, for instance, there is an evidence of rapid and drastic weakening in the purchasing power of Indonesia’ mass market, particularly outside Java, which has suffered severely from the declining commodity prices.

We have been cautious about the Indonesian banks given the threat of a softer fundamental outlook, high market expectations and demanding valuations (see our recent report on Indonesia banks sector, Navigating choppy waters, 4 February 2009). Indonesian government’ recent request for banks to lower lending rates and signs of softening purchasing power of Indonesia ’ mass market add to our concern.