Mandiri Sekuritas Banking sector: RR up from 5% to 8%

􀂄 Primary RR will be increased to 8%... Bank Indonesia will increase the minimum primary RR for banks from 5% previously to 8% which will be effective 1 Nov10. Yet, banks will obtain interest of 2.5% p.a for RR exceeding 5%. We foresee a margin erosion from this ruling as banks will forgo the yields previously earned from its placement in SBIs (estimated around 4%), leading to a decline in NIM by around 17-22 bps based on third party deposits (TPF) as of end Jun10. In addition to primary RR, banks still need to allocate secondary RR of 2.5% of third party deposits, but
unchanged from the previous ruling.

􀂄 .. on top of that, additional RR for banks with LDR below 78%. But, that's not it. To spur loan growth, BI has determined the minimum LDR for banks to meet, i.e 78%. A penalty of 0.1 of TPF will be imposed for every 1 ppt below the targeted LDR. Three banks under our coverage will be negatively affected from this ruling: BMRI, BBCA and BBNI. Based on Jun10 position, BBCA will have to pay the highest penalty of 2.6% in additional RR, followed by BMRI of 1.1% and BBNI of 1.0%. Please bear in mind that this new ruling will apply starting 1 Mar11, so the impact might not be as high as projected if these banks increase their loans until end of Mar11.

􀂄 .. and those exceeding 100%. To promote the implementation of prudent practices, Bank Indonesia will impose a penalty of 0.2 of TPF for every 1 ppt above the maximum LDR of 100% if the bank’s CAR is below 14%. For banks with CAR above 14%, there is no penalty imposed even though their LDR is exceeding 100%. There is no bank under our coverage will be negatively impacted from this requirement.

􀂄 BBCA will be the worst affected. From our calculation, BBCA likely will be affected the hardest by this new ruling, while BBTN will be the least impacted. Yet, bear in mind that this calculation is based on Jun10 figures and assuming that banks don’t change their policy. We believe that lending rate will likely increase thus reducing the impact of margin pressure. At this juncture, we still maintain BBRI as our top pick and overweight stance on the sector.