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Summary of Indonesia Banks Analysis

Core Content

The document provides an in-depth analysis of Indonesia's banking sector, focusing on growth expectations, credit quality, and stock recommendations for 2016. The key themes include economic growth alignment with banking performance, NPL management, and the performance of specific banks.

Main Points

• Economic Growth and Bank Performance: Banks are expected to grow by 13% YoY in 2016, driven by economic recovery. However, they will remain cautious in loan disbursement to keep NPL at around 3% by YE15 and 3.4% in 2016.

• Credit Quality and NPL Management: Credit quality is a temporary P&L issue, not a structural problem. Banks will continue to clean up their books, and NPL formation is unlikely to be as severe as during 2005-2006. The NPL coverage ratio is expected to rise back to the safety level of 100% by the end of 2016.

• Stock Recommendations: BBRI and BBCA are highlighted as top BUY recommendations, with target prices of IDR13,000 and IDR16,000 respectively. These banks are expected to deliver attractive 1-year returns due to their strong fundamentals and low NPLs.

• Key Risks: The growth forecast assumes that the BI will not cut the benchmark rate. A potential monetary easing could increase credit demand, but the government's under-delivery on 2016 budget realization poses a downside risk.

Key Information

Bank Performance Highlights

Top BUY Recommendations

• BBRI IJ (Bank Rakyat Indonesia):

  • BUY, TP IDR13,000
  • 2016F: 12.3x PER, 2.4x PBV
  • Strong performance in consumer lending, low NPL, and lower exposure to high-risk sectors

• BBCA IJ (Bank Central Asia):

  • BUY, TP IDR16,000
  • 2016F: 20.0x PER, 3.7x PBV
  • High-quality earnings, low NPL, and high buffer against NPL spikes

Risk Analysis

• High-Risk Sectors: Mining, construction, transportation, and trading are considered high-risk with higher NPLs. Agriculture and manufacturing are lower risk.
• FX Risk: FX NPLs have decreased since 2008. The trading, mining, and manufacturing sectors are the main contributors to FX NPLs.
• NPL Coverage: NPL coverage is expected to rise to 100% by the end of 2016. BBCA and BBRI have the highest coverage ratios among the top banks.

NPL and Loan Quality

• NPL Contribution by Sector:

  • Trading: 31.34 bps
  • Mining: 5.95 bps
  • Manufacturing: 50.35 bps
  • Other sectors (OTH): 91.48 bps

• NPL Coverage by Bank:

  • BBCA: 285% (includes SML)
  • BBRI: 150%
  • BBNI: 110%
  • BMRI: 100%
  • BBTN: 100%
  • BDMN: 100%
  • BJBR: 100%

Key Factors for Bank Growth

• Loan Growth: Expected to be around 13% YoY in 2016, supported by improved economic conditions and stable deposit growth.
• Deposit Base: BBCA has a strong deposit franchise with CASA covering 77% of its deposit base.
• Lending Rates: Cheap funding allows BBCA to offer competitive lending rates, which should drive loan demand.

Economic Drivers

• Private Consumption: Accounts for 55% of GDP and is a resilient driver of economic growth.
• Investment Inflows: Expected to rise due to improved business climate and reduced red tape.
• Government Spending: Infrastructure projects are expected to support loan expansion, especially for big banks.

Strategic Insights

• Sector Exposure: Banks with lower exposure to high-risk sectors and higher NPL coverage are preferred.
• Restructuring: The new OJK policy allows banks to restructure loans more efficiently, but aggressive restructuring could lead to structural issues.
• Market Concentration: The top 4 banks control 40% of the market, with smaller banks facing more challenges in maintaining loan quality.

Conclusion

Indonesian banks are expected to grow in line with the economy, with a focus on maintaining credit quality and managing NPLs effectively. BBRI and BBCA are recommended as top BUYs due to their strong fundamentals, low NPLs, and ability to absorb credit risks. The analysis emphasizes the importance of sector exposure, FX risk management, and NPL coverage in evaluating bank performance.