Credit Suisse: Indonesia Banks Sector – LDR targeting unlikely to result in lower asset quality

● Bisnis Indonesia, on 30 August 2010, reported that LDR targeting by Indonesian central bank, Bank Indonesia (BI), may pose a threat of lower asset quality ahead. We disagree with such a view.
● We believe most banks indeed fall within the LDR range targeted by BI (78%-102%). Of the top-ten largest banks, only three banks have LDR below 78% and one bank with LDR above 102%.
Outside the top-ten largest banks, we find average LDR of 84%.
● Our analysis suggests that with 0.5-1% increase in reserve requirements, BBCA, BMRI and BBNI will only incur penalties equivalent to 0.5-1.4% of their FY10E net interest income and will erode their FY10E NIM merely by 2.7-7.2 bp.
● We believe that the potential penalties are insufficient to provide any incentives for banks with LDR outside BI’s targeted range to alter their strategies just to meet the LDR target intended by BI. Thus, we maintain our ratings on Indonesia banks under our coverage and maintain BMRI as our top pick, followed by BBNI.