Credit Suisse Indonesia Banks - Impact of BBNI's and BMRI's rights issues

Citing Indonesia’s minister of state-owned enterprises, Mustafa Abubakar, Bisnis Indonesia, 18 August 2010, reported that the Indonesian government expects BBNI’s rights issue to take place in 2010E and BMRI’s rights issue to be completed after BBNI’s, either in late 2010E or early 2011E.

The rights issue is expected to increase BBNI’s and BMRI’s total number of shares outstanding by 22% and 11.3%, respectively, reducing government’s ownership in the two banks to 60%. Thus, post the rights issues, both BBNI and BMRI will be eligible for 5% tax rate cut for listed companies with over 40% free float.

After accounting for the higher number of shares as well as higher net income (due to 5% tax rate reduction), we believe that BBNI’s EPS post the rights issue will be diluted by 12.5% while BMRI’s EPS post the rights issue will be diluted by 3.5%.

We maintain our OUTPERFORM ratings on BBNI and BMRI. We believe that the proceeds from the rights issues will strengthen both banks’ capital and enhance their growth capacity.