Feb 22, 2016 15:43:45
Indonesian Banks

Rate cut and its repercussions
• Rate cuts announced; accommodative monetary policy aimed at boosting loan growth
• Short-term positive but repercussions of further regulatory action may be negative to banks
• Keeping our cautious stance; $BBCA and $BDMN remain our picks

What’s New
Rate cut announced. BI announced a reference rate (BI rate) cut of 25bps to 7.0%. In addition, BI also lowered the Rupiah reserve requirement by 100bps to 6.5% (effective March 2016). In line with this, deposit and lending facility rates were cut by 25bps to 5% and 7.5% respectively.

Impact and view:
Short-term positive… While this is positive in the short term for the banks, as banks tend to be able to reprice deposits faster than loans, there would be some ups deposits faster than loans ide potential to NIM, particularly for banks with a deposit mix skewed towards a higher time deposit composition (eg. $BDMN, $BBTN, $BTPN). The lower rates would also be positive to multi-finance companies from a funding cost perspective.

…but we are still keeping our cautious stance on the Indonesian banks because:

1) Concerns on asset quality Concerns on asset quality Concerns on asset quality are not over yet although our base case assumes stability in 2H16

2) OJK and BI have formed an ad hoc team to push down lending rates to below 10% below 10% and the team is expected to meet this task by end 2016. Among the possible approaches to this is a new OJK regulation to cap NIM at 4% with the aim to improve efficiency and competitiveness.

Should the NIM cap regulation be implemented this will be negative to banks as this would limit to a large extent, topline growth. Even if loan growth were to be boosted to 14% as intended by BI/OJK, it would be insufficient to maintain growth momentum for the net interest income line.

There have been noises in the past to lower lending rates for loans and also to impose a cap on NIM but none of these have so far materialised.

There were however two instances which the goverment had intervened to force down loan yields:
1) the KUR loan yield cap to 19% (2016: 9% chargeable rate to borrowers + government interest subsidy of 10%) - this affected $BBRI
2) lower loan yield for subsidised mortgage to 5% (from 7.5% previously) despite being partially subsidised by the Subsidized Mortgage Liquidity Facility Scheme/Fasilitas Likuiditas Pembiayaan Perumahan (FLPP) scheme - this affected $BBTN

Stock picks:
As we retain our cautious stance on the sector, our top picks remain $BBCA and $BDMN. Our pick on $BBCA lies on its defensiveness and strong financial indicators especially with respect to asset quality. $BDMN remains our pick for a turnaround story. Key risk to $BDMN however would be its inability to retain its high NIM (>8%) should the NIM cap be strictly implemented. This would mean $BDMN would have to significantly ramp up its strategy to lower funding costs quicker than planned.

Should the NIM cap be implemented, it would be negative to the SOE banks SOE banks SOE banks namely, $BMRI, $BBNI and $BBRI, as we are of the view that the government may impose these punitive recommendations on them before rolling it out to the entire sector.