Standard Chartered: Indonesian banks – Looking for switch opportunities

Rakyat [BBRI IJ; upgrade to OUTPERFORM; last close IDR 7,500, fair value upgraded to IDR 8,800/sh]

BCA [BBCA IJ; UNDERPERFORM; last close IDR 5,150, fair value upgraded to IDR 4,200/sh]

Mandiri [BMRI IJ; OUTPERFORM; last close IDR 4,675, fair value IDR 5,200/sh]

Paninbank [PNBN IJ; UNDERPERFORM; last close IDR 830, fair value upgraded to IDR 680/sh]

Danamon [BDMN IJ; IN-LINE; last close IDR 5,100, fair value upgraded to IDR 5,200/sh]


Expected start of a new credit cycle. We believe a new credit upcycle has just begun in Indonesia, with 2010E credit growth expected to rise to 21% from 2009’s level of 10%, driven by the pick-up in 2010 GDP to 5.5% from 4.4% in 2009.

Looking for switch opportunities. We believe there are currently short-term pricing anomalies between the Indonesian banks that present investors with the opportunity to switch from what we believe are overvalued to undervalued stocks, based on the differences between implied sustainable ROE and FY2010-11E ROE. We recommend buying undervalued names such as Rakyat (top pick) and Mandiri (OUTPERFORM), in our view, and switch out of both BCA (UNDERPERFORM) and Panin (UNDERPERFORM), as we see them as overvalued.

Catalysts and differentiating factors. Coincidentally, the undervalued stocks, Rakyat and Mandiri are also the early movers in the credit cycle, while the two most overvalued ones (BCA and Danamon) are clearly laggards. Rakyat and Mandiri's credit growth currently outstrips the industry’s, while BCA and Danamon are underperformers. Hence, we believe one of the key catalysts that will serve as a differentiating factor between the undervalued and overvalued stocks is monthly credit growth rates. Early movers with stronger credit growth should see a stronger pick-up in near-term earnings, thus serving as a re-rating catalyst vis-a-vis the laggards.

Rakyat: Top pick – highest growth and ROE. We upgrade Rakyat to OUTPERFORM from In-Line as it is, in our view, the best play on the new credit upcycle. It is an early mover, has the highest rate of credit growth at 25% and generates the highest 2010E ROE of 26.6%.

BCA - overvalued and risk of ROE disappointment. We maintain our UNDERPERFORM call on BCA as, in our view, its overvalued at a 2010E PBR of 3.8x with FY2010-11E ROE of 25%. We prefer to switch to our top pick, Rakyat, which trades at lower a 2010E PBR of 2.9x with a higher 2010E ROE of 26.6%.