BNP Paribas Research Insight

Indonesia Banks: Waiting for higher NPLs
NPL has started to increase reaching 4.3% in February 2009 but at a slower pace; expect NPL to peak at 6% in mid-09. Liquidity has improved and banks have started lending on selective basis; we keep our loan growth of 11% for 2009. Maintain NEUTRAL stance on the banks with top picks BDMN (TP IDR3,350) and BBNI (TP IDR1,500).

Better-than-expected 2008 results
Indonesian banks finished 2008 with better-than-expected results despite the problem faced by major global banks. Industry net interest margin improved by approximately 26 bps to 6.45%. Loan growth slowed down in the last quarter, but the industry still saw a loan growth of 31% y-y. This, coupled with low problem loans, helped banks to
register high margin and in return they put more provisioning charges. While the IDR was weakening, banks enjoyed rising foreign exchange earnings both due to their long position in USD, as well as from increasing foreign currency transactions.

Banks are preparing for the worse to come
NPL which averaged 3.4% in December will likely rise to 4.6% by end of 2009, after reaching the high of around 6% in mid 2009. We expect banks to keep writing off the bad debts, expected at 1.1% of average loans in 2009 compared to 1.5% in 2008. This would result in lower coverage ratio of 119% in 2009 compared to 130% in 2008. Loan growth is still expected at 11% in 2009 with banks starting to distribute consumer loans, comprising of mostly mortgage and auto loans, as well as micro credits.

Bank capital is still at a comforting level
Total capital adequacy ratio of the banks are still among the highest in the region with: 1) average total CAR of 16.0%p; 2) average Tier 1 CAR of 13.0%; and 3) and average tangible common equity to risk weighted assets of 15.1% in December 2008.
Maintain NEUTRAL stance – change of preference The financial stocks, accounting for 26% of the total market capitalisation, have outperformed the market by 6% in the past one month. Trading at 1.8x P/BV 2009E we maintain our NEUTRAL in the industry but we have made some changes in our stock preference due to the recent rally. Bank Danamon (BDMN IJ; TP IDR2,350) and Bank BNI (BBNI IJ; TP IDR1,500) are on top of our list, given their renewed concentration on the micro lending and steady operating improvement in the past four quarters.

Bank Negara Indonesia (BBNI IJ; TP 1,500), Bank Mandiri (BMRI IJ; TP 2,650), Bank Rakyat Indonesia (BBRI IJ; TP 5,150), Bank Central Asia (BBCA IJ; TP 3,100), Bank CIMB Niaga (BNGA IJ; TP 500), Bank Internasional Indonesia (BNII IJ; TP 170), Bank Panin (PNBN IJ; TP 500)