Narrowing loan yield gap; BNI, Mandiri and BCA our top picks
Our findings on lending-rate downtrends among major banks reaffirm our top picks in the sector. Lending-rate differentials among major banks have narrowed to 9.0% in 2Q10 from a high of 10.7% in 1Q09. We believe this trend demonstrates that banks with stronger deposit franchises (lower COF) have higher (loan) pricing powers than banks without such franchises. Also, BI’s LDR-linked reserve and proposed disclosures of prime lending rates would sustain lending competition – further exposing banks with weak deposit franchises.
Higher loan pricing power for banks with low COF
Intensifying lending competition has driven down lending rates across major banks, bringing down the lending rate differential across the major banks to 9.0% from a high of 11.4% in the past 18 months. Banks without a deposit franchise are seeing a larger decline in their lending rates. Further out, BI-proposed lending-rate disclosures could further accelerate lending competition, in our view. This bodes well with our top-pick selections for the sector, given their lower COF (and LDR).
These banks have generally higher (loan) pricing powers, and should be better able to weather lending competition.
Higher loan growth for banks with lower COF
As of 1H10, banks with lower COF (with the exception of BNI) have delivered higher loan growth of 22.7% than their peers’ 19.4%. The largest four banks (in terms of asset base) have their loan growth representing 44% of total system loan growth. With a number of regulatory changes, such as higher reserve requirements and LDR-linked reserve requirement and proposed changes in prime lending-rate disclosures as well as tightening liquidity, these banks should deliver higher loan growth due to their superior loan-pricing powers.
Top picks BNI/Mandiri/BCA; risks are loan pricing, regulatory changes
Despite our top picks’ recent stock re-rating, we continue to retain our Buy rating. We believe the next 12-months’ outlook continues to favour these banks. Given their low LDR (and COF), they could garner larger loan market shares. Consequently, these banks could deliver higher loan growth projections than our existing forecasts and hence should present lower earnings risks from increasing lending competition. BNI and Mandiri’s upcoming rights issues should present key catalysts for these names, and subsequently could deliver higher loan growth than what has been incorporated into our existing forecasts. We derive their target prices based on (ROE-g)/(COE-g) – see page 4 for details. Sector risks are irrational loan pricing, regulatory changes, slower macro economic growth, high inflation and currency fluctuations.
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