Indonesia's central bank (BI) expects that overall inflation in Sept-10 to be 0.5-0.6% MoM - down from a high of 1.57% in July-10 and 0.76% in Aug-10 as price increase for non-core components have eased off. This should translate into Sept-10 yoy inflation of 5.9-6.0% - down from a Aug-10 high of 6.44% yoy. On YTD to Sep-10, inflation would be 5.3-5.4%. Please refer to chart below.
This supports with our benign interest rate outlook for Indonesian banking sector. Already the central bank has indicated to keep overall interest rate at 6.5% (and likely to remain unchanged at least until end of 2010). This bodes well with our overweight call on the indonesian banking sector. Indeed, despite the sector overall recent re-rating, we continue to maintain our overweight call. With structurally low inflation and interest rate environment and combined with pro-loan growth regulatorions, these should drive loan competition driving lending rate lower. As we have argued in previous reports, rate differential between loan and SBI are still high, suggesting room for lending rate reduction of approximately 200bps. In our recent report, we have also highlighted that the lending rate (and NIM) gap amongst
major banks have narrowed. On the back of these, we reiterate BNI/Mandiri/BCA as top picks amongst major banks and Jabar in the small cap space.
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