CLSA Indo banks, highest ROA in Asia and funding future returns

Nick Cashmore looked at Indonesian banking sector. We are cautious on the near term outlook but the future of Asia's most profitable banking market looks rosy. Take any weakness as an opportunity to accumulate Indo banking stocks.

The reality is that Indonesia's bank ROA is the highest in Asia and these conditions are unlikely to dissipate anytime soon.

We think there are 3 possible explanations for higher ROA for Indo banks:
(1) post 97-98 Asian crisis, Indonesian banks have been focusing on higher margin NON corporate loans. And this includes consumer, micro, and SME

(2) ROA is higher now than pre-Asian crisis because back then banks were focusing on small margin related party lending.

(3) We also suspect that bankers here still remember the 97-98 crisis and have been overly cautious in lending policies and loan pricing, always assuming the worse. With high provision in mind all the time, loan is being priced accordingly (high). But the high NPL fears never materialized so far, resulted in high NIMs for Indo banks.

None of the 3 factors above will change in the near term future, in our view. Consumer, micro, and SME sectors are still very much under-penetrated in Indonesia and this should mean room for growth.

Banks will continue to play an important role in supporting Indonesia's growth rate. Over the past 5 years, banks' LDR rose from 50% to 64%. There might be an issue with future funding shortage. Current rate of growth can't be sustained. Banks will have to boost internal capital generation.

Key points from the report:
*Intermediating growth. Over the past 5 years, total sector assets have grown 69% to US$122bn. Indonesia's GDP doubled over the same period.
*Future funding shortage. Current rate of growth can't be sustained. Slow internal capital generation means banks will need to boost internal capital generation by cutting div, raising capital, and or constraining credit expansion.
*BBCA, BBRI, and BMRI have already reduced payout ratios, BDMN has done the rights issue.
*Highest ROA in Asia, unlikely to dissipate soon.
*Valuations: near term, one SD above the 5-year average.

CLSA INDO: Indo banks, NPL on the rise

Nicolaos Oentung is recommending investors to take profits on recent rally as visibility on NPL remains poor. Inflow of new NPL has been rising sharply since 4Q08 and Nico thinks that we are still early in the NPL cycle.

NPL is on the rise. Inflow of NPL has been rising sharply since 4Q08. Indonesian banks have shown declining NPL ratio in the most recent quarter, however this masked the true NPL trend given the large write-offs. Hence after adding back the write-offs, we calculate the inflow of new NPL has in fact been rising.

Indo banks are going to report 1Q09 results soon and there are good chances for positive surprises. Maybe investors can wait until after 1Q09 results before taking some profits .

Key points from the report:
· Loans growth continues to decelerate, while NPL is on the uptrend.
· Feb 09 loans growth: +30% YoY, down from peak of +38% YoY in Oct 08.
· Indicative Mar 09 figures also show further slowdown to +27% YoY.
· 1Q09 earnings likely weak. We expect banks to post on average 5% YoY decline in net profit for 1Q09. NIM pressure should ease esp for Danamon (BDMN IJ), but loan growth will be tepid.
· We maintain cautious stance. Key issues remains while we have assumed worst case scenarios for NPL in our models, visibility remains poor.
· As a rough guide, trough to peak NPL lasts about 15 months in last cycle (05-06) with real GDP slowing to 5.0% vs. current six months with 3-4% GDP growth.