The appointment of Bank Mandiri (BMRI) President Mr. Agus Martowardojo as Indonesia’s Finance Minister is positive for the market and banking sector, in our view. For BMRI, it creates a vacuum but we are of the opinion that the impact will be minimal and maintain our Buy recommendation.
Market will take comfort from the fact that someone with experience of managing a bank and understanding the business environment has taken over the reigns. The immediate impact on the banking sector could be in the form of three possible regulations being debated: 1) Lowering of lending rates, 2) Imposition of higher Cash Reserve Requirement for banks with low LDR, and 3) Allowing state owned banks to give haircut to settle non performing loans (NPLs).
The first two of these fall under Bank Indonesia domain. However, the Finance Ministry may have some opinion on these issues. There is no legal mechanism to impose a maximum lending rate. BMRI was strongly opposed to penalizing banks with lower LDR. The third issue directly impacts BMRI, along with other state owned banks. Having successfully tackled the NPL position of BMRI, the new Finance Minister is likely to have good insight as to how to tackle the Rp82Trn NPLs of the banking sector.
No update yet as to who will take over the reigns at BMRI. Most of the management was given another 5-year term earlier this week, which gives comfort that the team will remain intact. The new Vice President is the former MD of Corporate Banking. The two main challenges for the new President will be to maintain the strategic thrust (into higher yielding assets and build deposit franchise) and to keep NPLs in check.
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