Evidence of worsening asset quality
Citing the head of financial system stability of Bank Indonesia, Wimboh Santoso, Kompas, 16 April 2009, Mutu Kredit Memburuk, reported that nominal Non Performing Loans (NPL) may have grown to Rp54 tn by mid-March 2009, up Rp12 tn from the Rp42 tn nominal NPL at end of 2008. As such, Kompas, reported that the gross NPL ratio of Indonesian banking sector may have reached 4.2% by mid- March 2009, versus 3.2% at end-2008.
The worsening asset quality of Indonesian banking sector is in line with Bank Indonesia’s estimate for the country’s 1Q09E real GDP growth of 4.6% down from 6.4% in 3Q08A and 5.2% in 4Q08A. The trend of asset quality deterioration is in line with our expectation (see our Indonesia Banks Sector report, 5 February 2009, Navigating
Choppy Waters, where we expect NPL to start deteriorating a quarter after the first sign of weakening in real GDP growth).
The situation may not be as bad as our initial expectations
Despite evidence of worsening asset quality in Indonesia in 1Q09E, we start to see risks that the situation may not be as bad as our initial expectation. We have yet to see any sign of recovery. However, our analysis on Indonesian banks’ deposit, lending and interbank rates, indicate some early signs of stabilising. Our initial expectation was for the early signs of stabilisation to occur at the end of 2Q09E, implying that the presence of such signs at the end of 1Q09E indicate that the situation may not be as bad as our initial expectations.
Our preference remains BBRI
We have yet to see signs of recovery, rather have only documented the early signs of stabilisation. However, Indonesian banking counters have experienced significant re-rating in the past three months and valuations are no longer at discounts. Our preference remains BBRI.
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