Danareksa Banking Sector (OVERWEIGHT) A mixed policy

Tightening liquidity
In a bid to curb inflation, BI will raise minimum reserve requirement (MRR) to 8% from previously 5% – an unusual policy to BI, we think, especially when room for further increase in benchmark rate is still aplenty. On the flip side, keeping rate intact would mean that economic growth is likely to be sustained, albeit at the slight expense of the banking industry. While overall impacts are unlikely to be significant – some Rp50trn of liquidity absorbed, or some 17% of existing liquidity, such implementation would negatively impact those banks that has high loan to deposit ratio, specifically BDMN and BBRI. The additional MRR could be met through the sale of its existing SBI or government bond, but the need to maintain greater loan growth will require the banks to seek additional funding. Under such policy, we estimate banks COF to increase by 14.3bps, assuming most of the funding is obtained through additional time deposits – which is most sensitive to interest rate. Note that this policy will be implemented by November this year.

Still keeping pro-growth policy
Meanwhile, banks are likely to bear an additional cost related to LDR, a policy that will be implemented sometime in March next year. The idea is to boost lending by keeping LDR to a minimum of 78% and cap it to a maximum of 100%. Penalty is set – about 0.1% of deposit to be placed as MRR for every 1% below the minimum cap, and about 0.2% of deposit for every 1% above the maximum limit. While such policy is intended to increase banks role in the economic growth, it runs a risk of bad lending practices, hence greater NPL, we believe. Assuming such penalty is being enforced; larger banks would have to bear another 4.0-7.9bps of additional COF. Of the larger banks, BBCA, having the lowest LDR, would have been the most impacted, while BMRI and BBNI, both have the intention to go for right issue, are also unlikely to comply with such requirement in the near term. Alternatively, these banks could reduce their deposit by lowering deposit rates, something that can only be done if liquidity is aplenty, much like we found in BBCA.

What’s worst?
Bottom-line, both policies are viewed negatively on the banking sector as general, although impacts to earnings are unlikely to be significant. NIM is likely to be compressed with greater funding needed to keep its loan growth intact amid the need to comply with MRR. On a net basis, BBCA and BMRI would have been the worst impacted – about 17bps higher COF, that’s if both policies were to be implemented. Still, such policies will not lead to higher lending rates, we believe, which is something that the bank needs to gain greater volume growth. BBRI and BDMN will be the least impacted, since both would only comply with the additional 3% of deposit for the purpose of MRR. Even if these two banks are faced with higher COF, its greater asset yield will pretty much offset such increases, we believe.