Citigroup Indonesia Banks - The Rising Loan Tide

 Focus on Deposits As Tightening Starts — Bank Indonesia (BI) has taken the first step to tighten monetary policy by imposing a higher Reserve Requirement. We expect more measures to follow as loan growth momentum remains strong and may even surpass BI’s 2010 target of 22-24%. Citi expects an interest rate hike in Q1 2011. A rising LDR (sector 78% with 10.5% Reserve Requirement from Nov 2010), skewed liquidity (88% of excess liquidity is with 3 banks) and widening lending rate-bond yield spread suggest pressure on NIMs from both ends. BMRI remains our only Buy and BBCA our only Hold as both 1) benefit from higher interest rates 2) have excess liquidity and 3) follow a balanced loan/deposit growth strategy. Valuations for BMRI and BBCA seem at a premium to peers, but we see consensus as being too bullish on earnings for the peers in 2011.

 Loan Growth Rising Rapidly — Net loan disbursements in 8M CY10 were c~Rp200Trn. Assuming historic seasonality, this translates into a 2010 expansion of 24%. Momentum is expected to continue as loan approvals (not disbursed) have risen to 35% of total loans outstanding.

 Need to Raise Deposits— Deposits to GDP have been declining since early 2000s, while LDR has been on a rising trend. Incremental deposits in the last 3 years have matched incremental loans. NIMs have been supported by changes in asset mix. Excess liquidity is Rp238Trn but, excluding BBCA, BMRI and BBNI, is only Rp29Trn or 2.3% of the remaining banks’ deposits. Among the large banks, BBCA and BBRI have been gaining market share in CASA in the past 3 years, while BMRI has maintained share and BBNI has lost out. For BBRI, this has still not been sufficient to meet its strategy to gain loan market share.

 Lending Rates Under Pressure — Lending rates (working capital) have been relatively stable in the last 3 months. They have not followed the decline of bond yields and the spread has widened to a peak level of 500bps. Time deposit rates have also been stable.

 Rights Issues — Rights issues by BMRI and BBNI have been approved and will add c-USD2.4bn to their free float (the large 5 banks have a combined current free float of USD24bn). The rights will be non-dilutive as lower tax rates will compensate for larger equity bases. BBRI, in particular, will face increasing pressure on the lending side, and has an LDR of 87% and a CAR of 14%. In 2010, state-owned banks have been lagging in both loan and deposit growth, but the equation may reverse in 2011.