CIMB Sector update - Banks - New reserve requirement: pacing loans, while quelling inflation

Maintain Overweight on banks. The central bank has indicated that the imminent new statutory reserve requirement (RR) regulation will use 78-102% of banks’ loan-deposit ratios (LDR) as an ideal range, where non-compliant banks could be penalised by an additional RR of 0.5-1.0% pt of deposits, a policy resembling the one in 2005. Although some banks’ earnings could be lowered by 1-2%, the policy is positive, in our opinion, on two counts. First, it could possibly create upside surprises by pacing loan growth; second, it could quell inflation by absorbing excess liquidity, which is a preferred means to raising rates. We maintain our optimism on the sector. We like most Indonesian banks, though placing emphasis on BNI, Danamon, and Mandiri. Manageable inflation should be a prime catalyst for the sector, in our view. There are no changes to our forecasts, ratings or target prices.