Apr 26, 2016 13:52:39
Banking; Limited Impact from Change in BI Reference Rate

- BI will change the benchmark rate into 7-day reverse repo rate, effective 19 August 2016. While OJK has yet to decide their maximum rate, we believe there will not be any major change in rates and hence impact is neutral on banks. We maintain our Neutral rating on the sector on rising NPL and lower margin.

- New central bank benchmark rate. Bank Indonesia has just announced that they will change the reference rate from BI rate into 7-day reverse repo rate (RRR), effective 19 August 2016. This will bring down the benchmark rate closer to the overnight interbank rate of 4.8%, in line with the practice conducted by many other central banks. The 7-day RRR is currently at 5.50%, while the BI rate is at 6.75%, similar to the 12-month interbank rate.

- OJK needs to change their ceiling rates. All of the banks under BUKU 4 (main capital >Rp30tr) and BUKU 3 (main capital of Rp5-30tr) are required to set maximum rupiah time deposit rates of BI rate +75-100bps, or 7.50-7.75% pa. With the BI rate no longer available in the future, OJK needs to use the new benchmark, either the 7-day reverse repo or other rate. What we have to confirm is whether OJK will keep the same premium to set the maximum rates or change it (reduce or expand it). If they use the new reference rate and keep the same premium, banks will see their cost of funds decline substantially by 125bps. However, the central bank has been quoted saying that OJK will use the 12 month SBI (currently at 6.75%), similar to the current BI rate, as the base for the deposit rate cap, in which case there will be no change in rates.

- Implication to the banking industry. We believe the impact will be neutral to banks. While there is a chance that deposit rates will be lowered following the change of the reference rate, BI’s statement that OJK might still use the 12- month SBI rate should keep the rates in line with the movement of the benchmark rate. The LPS guaranteed deposit rate (for deposits <Rp2bn in a bank) for commercial banks is at 7.25%, while the maximum special rate set by OJK for large deposits is at 7.75%.

- Concerns over deposits shifting to bonds overstated. There has been a concern that some large deposits will be shifted into the bond market, in particular the government bonds, which provide 7.4% yield for 10-year tenor, as well as the corporate bonds with higher yield. However, the market size of the government bonds of Rp1,473tr is 82% of total rupiah time deposits and the size of the total bond market of Rp1,727tr is 96% to total rupiah time deposits. This makes little room for rupiah time deposits to switch into bonds given their similar size. What will happen in our opinion is the rising demand for bonds, increasing their value and lowering the yield towards the deposit rates. The government will still keep issuing new bonds, but this will not be enough to satisfy demand, hence depending on the OJK’s new rate cap on large deposits, we do not see significant shift in time deposits and concerns over liquidity problem is not warranted.

- Deposit structure – Based on LPS data, total banks’ third party funds were Rp4,402tr in Dec 15, of which 84% of them were rupiah deposits or Rp3,723tr. Of this amount, 49% (Rp1,812tr) were rupiah deposits with outstanding amount of >Rp2bn (11% or Rp411tr with deposits between Rp2-5bn and 38% or Rp1,402tr with deposits >Rp5bn). Hence the size of the large deposits of >Rp5bn is close to the government bond market as well.

- Expect rates to decline. We have factored in declining interest rates on both deposits and lending rates of around 75- 100bps pa in 2016-2017. Aside from the government’s pressure for banks to lower the rates, the lower inflation expectations should also support lower rates. Under the declining interest rate scenario, usually banks will see a temporary margin expansion as they lower the cost of funds a few months before lending rate adjustment. However, we expect a 20bps average margin reduction in the industry in 2016 and another 30bps in 2017, taking into account steeper reduction in lending rates, as anticipated by the authorities.

- Maintain Neutral on banking. At this juncture, we maintain our Neutral stance on the banking industry as we see risk of rising problem loans in the coming months plus lower margin. This should limit the industry's earnings growth, which we expect at 7% this year. We keep BBNI (TP Rp6,000) and BBTN (TP Rp2,100) as our sector top picks. The recent price weakness on BBRI (TP Rp12,000) makes its valuation attractive at this level however, we keep our Neutral call for now.