CLSA Indo banks by Bret Ginesky

This is has been talked about for a while and expected by the market. To facilitate a more competitive lending landscape and the same time making sure there is a wide enough safety net, BI will start penalizing banks with LDR at extreme ends and ask for higher reserves. There is going to be short term impact to earnings esp for Banks with low LDR like BCA but most likely going to be mostly offset by higher fee income. Does not change the structural story. Remain OWT Indo banking sector.

· Bank Indonesia’s minimum required reserves now stand at 10.5% from 7.5% previously. As a new primary reserve of 3% of rupiah deposits was added. These funds will earn a 2.5% interest rate.
· A liquidity reserve was also imposed penalizing banks with an LDR below 78% and above 100%. The point of this is to increase competition and lending.
· BI tightens policy without raising interest rates allowing the central government to buffer the inflow of funds into the country. Indonesia already boasts one of the lowest required reserves in our Asia (xJapan) coverage universe, this helps bring reserves closer to the peer median.
· Banks will almost certainly do their utmost to offset these costs through fees, charges and possibly higher interest rates. The net impact on 2011 is to lower earnings by 4-8%. BCA is the most affected.
· We remain OWT the sector as they are a prime beneficiary of accelerating growth and asset reflation. Our top picks are BBNI and BMRI. UWT BDMN.