Credit Suisse: Indonesia Banks Sector - More attractive than meets the eye

■ Concerns unjustified: With some Indonesian banking stocks trading at the higher end of their historical range, investors often want to know whether the valuations and earnings expectations for these stocks are stretched. Our study found no such evidence and we deem the current valuations and earnings expectations for Indonesian banking stocks to be very modest.

■ Modest expectations: We employ consensus estimates into Gordon’s growth model and find that the risk free rate implied by the current share prices is 8.23-9.61%, higher than the current five-year Indonesia government bond yield of 8.13%. In addition, consensus estimates remain 9-16% below our already modest earnings forecasts. Our FY10E loan growth, PPOP growth and credit costs are in line with the historical average; very modest assumptions, in our view, given the rosy outlook for Indonesia’s economy. We find no evidence that the valuations and earnings expectations implied by the current share prices are demanding, as these are built based on reasonable valuations and very modest earnings expectations.

■ Room for more upside: We see room for potential upside in Indonesian banking stocks from: 1) potential consensus earnings upgrades and 2)potential rerating, should Indonesian government bond yield improve from its current level. In the Indonesian banking sector, we like (in our order of preference): BMRI, BBRI, BDMN, BBCA, PNBN and BBNI. We increase our target price for BBCA (from Rp5,300 to Rp6,300), BBRI (from Rp9,600 to Rp11,000), BMRI (from Rp5,900 to Rp6,900), BDMN (from Rp6,100 to
Rp6,700), BBNI (from Rp1,680 to Rp1,925) and PNBN (from Rp900 to Rp1,000).