Danareksa Banking Sector State Owned Banks Show Better Performance

Better profits performance

According to the latest central bank data, profits after tax for the banking industry fell by 12.6% yoy to Rp30.6tn in 2008 from Rp35tn in 2007. The profits of state owned banks also declined, but at a much lower rate of 1.3% yoy (from Rp13.3tn in 2007 to Rp13.2tn in 2008). Why is this so? Well, we believe it is indicative of a “flight to security” whereby state owned banks are seen to be a much safer place to put funds than private sector banks. As a result, state owned banks can offer lower deposit rates, allowing them to enjoy a lower cost of funds. This is reflected in the data which shows that interest expenses for state owned banks only rose 6.4% yoy while the increase for the banking industry as a whole was 11.5% yoy.

A Widening Liquidity Gap
As of December 2008, the LDR of state owned banks at 70.3% is lower than the industry’s 74.6%. Moreover, this liquidity gap has been widening since August 2008 (see chart). The “flight to security” phenomenon seems to be giving state owned banks an advantage when competing for third party deposits. Going forward, we believe that state owned banks will be able to maintain their stronger liquidity levels.

Minimal Treasury losses
State owned banks recorded minimal forex and derivative losses at only 0.79% of their operating income. For the industry as a whole, this figure was 7.69%. This is good news for the bottom lines of state owned banks.

BRI is our top pick
We remain upbeat on the prospects for state owned banks. This data suggests that there is less risk of any unwelcome surprises in late March when state owned banks will publish their FY08 results. Among the individual stocks, we have BUY recommendations on BRI, BNI, and Mandiri. However, our number one pick remains BRI for its enviable microfinance operations.