Banking stocks have run at speed 48% ytd, outperforming JCI by 1,000 bps. Current regulation imposed by central bank should lead to lower NIM as on funding side, cost of fund increased due to hike in RR while on pricing side, borrowers will seek lower lending rate offered by the banks. To survive, banks must boost their lending volume at cost of potential rise in NPL. Hence banking loan wil grow in higher degree, but valuation seems already to price-in. HOLD.
± Given Potential of Lower NIM, Higher Loan Growth is Set to Be Confirmed
Historically banking share performance inline with banking loan growth. Loan in 1H10 grew at 19% yoy still lower than its historical average 22%. Moreover banking loan growth moved in opposite direction with NIM level. Thus given potential of lower trend in NIM going forward, higher loan growth is set to be confirmed. We estimate loan growth could reach 24% yoy this year. However we are doubting that higher loan growth is worth to be priced in further higher banking stock price. Gap for current share price to banking fair value seems to narrow nevertheless analysts already rolling forward book value to 2011. To roll forward the valuation using 2012 book value is too aggressive in our view as it has too much margin of errors. Thus it should be better for investors to go CHECK and not raising more bets, translates into HOLD in finance industry terms. We remain our buy call on BBRI as it has strong position to capture rapid demand on SME lending, improving CASA, highest ROE and acceptable level of NPL, nevertheless NIM under pressure.
± Cost of Fund Surged in Average by 22 bps.
Under new required reserve from 5% to 8%, we estimate there will be about Rp503 trillion money in terms of M2 (broader medium of exchange) that will be absorbed by the central bank, equal to 23% of total M2. This will squeeze the magnitude of inflation which reached 6.4% in August. On lenders side, higher RR will translate into higher cost of fund, thus should result in lending rate escalation. On average we see an upward cost of fund by 22 bps in our banking stock universe, adjusted with weighted deposits rate and penalty. BDMN and BTPN will be the least beneficiary with cost of fund increase by 25-30 bps nevertheless both LDR level is in the range of the threshold 78%-100% and not given the penalty, due to small portion of CASA ratio and higher deposits rate than peers. BMRI, BBCA and BBNI will get additional penalty at 1.1%, 2.6%, and 1% respectively, however BBCA will be the least affected thanks to its low cost funding structure, cost of fund only increased by 19 bps. As cost of fund increase, lending rate will also be reiterated to higher scale. Realizing the effect on their own policy, central bank will oblige the banks to publish their prime lending rate on newspaper periodically of which borrowers will seek to lower prime lending rate offered by the banks, thus put pressure on profitability margin. To survive and keep growing, bank with high capital relative to their weighted risk on assets and low cost funding structure will deliver strong performance in terms of higher growth which are BMRI, BBCA, BBRI and BBNI.
± BMRI and BBNI Right Issue, Take Advantage from Strong Market Momentum
Current strong market momentum is seen as the best time for the right issue execution, as to why BMRI and BBNI struggle to be the first runner this year. Both stock prices almost and already hit the fair value which gives assurance on the target proceed and discount to the exercise price. Any losing market momentum is risk for both. Under worst scenario, BMRI balance sheet is more sound fundamentally than BBNI as it has stronger capital.
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