AAA Bank New LDR and RR Ratio, Paradox Spur Lending, Costing Margin

Higher RR will also play as the the tool for higher lending rate through the transmission of cost of fund formula (average deposits rate/1-RR). Higher lending rate means more expensive money to lend, thus lower loan growth. Hence the new regulation imposed by the central bank seems paradox in our view, because maintaining margin means higher lending rate thus lower demand of loan meanwhile the central bank demand banks to have LDR ratio at 78% - 100%.

± New RR from default 5% to 8%.
Bank of Indonesia on Friday (3/9) released new RR (required reserve) level from which set default of 5% to 8%, to hinder threat of inflation which already reached 6.44% yoy on August. At the same time, the central bank also regulate LDR level for banking industry at range 78% - 100%. For those banks with LDR below 78% will get penalty at default plus additional 0.1% RR for every 1% LDR difference below 78% and for those banks with LDR above 100%, will get penalty at default plus additional 0.2% for every 1% difference above 100%. However penalty would not be eligible if banks have minimum capital adequacy ratio at 14%. New rules will be effective on November 1, 2010.

± Spur Lending by Costing Profitability Margin
In the normal case, higher RR means higher deposits portion must be set asided by the banks into the central bank vault cash. That will lead to liquidity absorbtion which could hinder inflation. But at the same time, higher RR will also play as the the tool for higher lending rate through the transmission of cost of fund formula (average deposits rate/1-RR). Higher lending rate means more expensive money to lend, thus lower loan growth. Hence the new regulation imposed by the central bank seems paradox in our view, because maintaining margin means higher lending rate thus lower demand of loan meanwhile the central bank demand banks to have LDR ratio at 78% - 100%. In a quick take, the new rules can be translated as banks should spur lending by costing profitability margin

± BBNI Get Penalty, BBRI, BDMN, and BTPN Pass, BBCA on Threat
BBCA, BMRI, BBNI will be the least beneficiary under the new rules, since the three have LDR ratio in 2Q10 each at 51%, 66.2%, 68.2%. BBNI will be the only bank who hit by higher cost of fund and additional penalty of 1% at the same time, since its total CAR ratio was below the threshold level, 13.8%. Meanwhile BBCA and BMRI will be free from penalty since both the total CAR ratio were at 14.7% and 15.3%. BBCA will be on threat to get additional penalty on RR by about 2.7%, since the total CAR ratio is nearing the threshold. BBRI, BDMN and BTPN will be totally free from additional penalty on RR level since their LDR level was at range 78% - 100%.

± Banking Sector, Downgrade to Neutral from Outperform
Nevertheless the banks is given 2.5% interest on 8% RR, which could lessen the cost of fund, 2.5% however still gives negative spread compared to average deposits rate which currently vary from 6% up to 10%. Given the likelihood of banks will have lower profitability margin under the new rules, we rate banking sector from OUTPERFORM to NEUTRAL in 2011. In addition, since the regulation is more to promote lending, the rise of NPL is also on sight. Banks with disclipline cost of credit, low cost of fund structure, high ROE and high capital adequacy ratio still have rosy outlook. We prefer BBRI, BMRI and BBCA over BBNI and BDMN. BTPN Neutral.