Teguh Hartanto (teguh.hartanto@bahana.co.id)
Rating: UNDERWEIGHT (from Neutral)
NIM: Significant pressure
§ 7-day repo rate as a reference to replace BI policy rate: The Central Bank plans to alter its benchmark rate using the 7-day repo rate instead of the regular BI policy rate as a reference, effective August 2016. This would move in line with the US short-term Fed rate, to help manage the overnight inter-bank rates. Hence, there is no change in the Central Bank’s policy stance in applying its monetary base practice.
§ Overpriced short-term 1-and-3 month time-deposit rates: 7-day repo rate is currently priced at 5.50% vis-a-vis the 6.75% BI rate (based on 12-month tenure), which has historically averaged 225-250bps above inflation. That said, 1- and 3-month deposit rates of 7.3-7.9% are somewhat overpriced. Note that the bulk of banks’ time deposits are derived from 1- and 3-month deposits.
Outlook: Increased liquidity risk
§ Faster-than-expected lower lending rates: Given the aforementioned scenario, we believe banks would need to re-price their short-term time deposits, which is likely to raise the liquidity risk in the system. That said, the government may pressure banks to accelerate lowering their lending rates. The failure to secure liquidity at lower rates combined with pressure in lending rates would produce significant margin contractions, which may last until next few years. Additionally, there are no clear guidelines in the application of a single lending rate on the different types of loans.
§ Higher cost of credit on asset quality deterioration: On top of the NIM pressure, the issue on loan quality remains, due to the prolonged slowdown and the uncertain global economic outlook involving hard commodity-related industries. Both NPLs and special mentions are still up-trending, leading banks to continue building up provisioning. Likewise, the size of debt restructuring may reflect unfavourable loan quality based on the respective debtors’ financial and industry outlook. On a more positive note, Indonesian banks have a strong overall CAR of around 20%.
Recommendation: Cut to Underweight with BBCA as most preferred
At this stage of the cycle, we cut our industry stance from Neutral to UNDERWEIGHT on over-regulation. Sector downside stems from margin pressure and worsening loan quality. Furthermore, increased fee-based incomes are challenging, as cardholders are hesitant to use e-money transactions due to the government’s recent involvement in accessing credit card lines to raise tax revenues. Additionally, demand for loans remains insufficient to offset the earnings shortfall arising from the aforementioned issues. Amongst the 10 banks under our coverage, BBCA is our most-preferred stock with expensive valuation as an investment deterrent as reflected in our HOLD rating. Having said that, a higher-than-expected risk premium has us lowering our target prices for all banks under our coverage (exhibit 5). Risks to our sector call: massive fund flows from a successful tax amnesty program, industry deregulation and increased consumer loans.
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