DBS Banking BI may require LDR of 75-95% by 2011

It was reported in Kontan and quoted on Bloomberg that BI plans to require banks to have a loan-to-deposit ratio (LDR) of 75-95%. We believe this new rule is aims to further accelerate the pace of loan growth in the Indonesia banking system. The new rule is likely to be effective in 2011 and banks are likely allowed a six months transition period to comply accordingly. Banks with LDR below or above this range
will be imposed a penalty of 0.5-1.0% of their third party funds.

Official BI banking statistics up to May 10 shows that the banking system's LDR current stands at 75.7%. Some banks have stated their concern about the high probability of rising default loan if credit is disbursed aggressively to meet minimum LDR target.

Of the four banks under our current coverage, only Bank Central Asia (BBCA)'s and Bank Mandiri (BMRI)'s LDR is not within the stated range. Up to 1Q10, BBCA's LDR stood at 51% while Bank Mandiri (BMRI)'s LDR as released in its 2Q10 results stood at 66%. Separately, Bank Rakyat Indonesia (BBRI)'s stood at 87% and Bank Danamon (BDMN)'s at 94% as at 1Q10.