Archive Tag:BBRI

Bank Rakyat Indonesia ($BBRI), Bank Mandiri ($BMRI), Bank Negara Indonesia ($BBNI) to take on loans from China Rp130tn

BBRI, BMRI, and BBNI potentially receive loans from China Development Bank (CDB Bank Rakyat Indonesia (BBRI), Bank Mandiri (BMRI), Bank Negara Indonesia (BBNI) to take on loans from China Rp130tn BBRI, BMRI, and BBNI potentially receive loans from China Development Bank (CDB) to finance government projects totaling to USD10bn or equivalent to Rp130tn next year. Deputy Ministry of SOE of Financial Services, Construction…

BBRI targets 3% growth in net profit

Bank Rakyat Indonesia (BBRI) targets its net profit to grow by 3% YoY for FY16. The bank stated that there are 3 main components that will affect its net profit this year, including overhead cost, cost of fund, and risk premium. The bank will focus on raising its funds from public and funding…

BBRI – Bank Rakyat Indonesia ($BBRI) – Inline result


BBRI – Bank Rakyat Indonesia ($BBRI) – Inline result

Key highlights on 1Q16’s result:¨ Net interest income were 24.5%/25.0% of our/consensus forecast as interest expenses down by 6.1% YoY.¨ Net interest Bank Rakyat Indonesia ($BBRI) – Inline resultKey highlights on 1Q16’s result:¨ Net interest income were 24.5%/25.0% of our/consensus forecast as interest expenses down by 6.1% YoY.¨ Net interest margin expanded by 51bps on YoY basis mostly supported by lower blended cost of 3.88% in 1Q16 (down by 62bps on YoY basis) as CASA proportion rose to



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 (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.


BBRI: Micro Help for Earnings

EPS growth from micro segment
FY15 net profit of IDR25.4t (+5% YoY) is in line with our FY15F. Corporate
NPLs increased and are likely to remain a main risk in 2016. But as with
last year, we believe this could be compensated by strong micro-loan
growth, providing stock catalysts. BBRI remains our top banking BUY with
GGM TP still at IDR13,000

FY15 in line
BBRI managed to keep its NIM above 8% on the back of: 1) a 17% YoY loan
increase in micro-loans; 2) a 5ppt increase in its CASA portion to 59%;
and 3) a 60bp cut in term-deposit rates since 1Q15 to 8.5%. NPLs fell
further from their 2Q15 peak of 2.3% to 2%, accompanied by a 221bp
drop in SML to 4.8%. This was made possible by the restructuring of
IDR20t loans in FY15, which minimised provisioning in 4Q15 and kept NPL
coverage at 150%. The result was a IDR25.4t (+5% YoY) net profit for FY15
or IDR24.7t if we strip out IDR700b of other operating income arising
from accounting adjustments. This is still in line with our IDR24.7t

Corporate NPLs the main risk, but BBRI has buffer
Corporate NPLs – excluding SOEs – spiked 3ppts to 4.8% by end-2015,
mostly from property and commodity businesses. We see this as the main
threat, not just to BBRI but also other banks serving corporates. While
we think corporate asset quality could deteriorate further, such loans
only make up 13% of BBRI’s portfolio. As such, its total NPLs might only
inch up to 2.2% by end-2016 from 2%, in our estimation.

Maintain BUY; TP at IDR13,000
We believe strong micro growth will prop up BBRI’s NIM and keep its NPLs
lower than the sector. It remains our top BUY with our GGM TP still at
IDR13,000 (12.4x FY16F P/E, 2.4x P/BV) for an attractive 21% ROE for

Big banks’ FY15 in line with estimates; BUY BBRI

A closer look at big banks’ unaudited FY15
Indonesia’s big banks have released their unaudited FY15 financial
results. Net profits are in line with our estimates and we expect no
negative surprises in NPL that might cause coverage ratios to drop
significantly upon the official FY15 announcement. Among the big
players, BBRI remains our Top BUY for its attractive ROE.
BBRI: Top BUY, TP at IDR13,000
BBRI booked a IDR25t net profit (+7% YoY), in line with our IDR24.7t
forecast. Loans grew 13% YoY on strong expansion in the high-NIM micro
business. We expect NIM to remain close to 8% in 2016 on higher KUR
volume. BBRI’s excellent risk control in the segment should allow the
bank to keep provisioning expense to a minimum while maintaining a
sufficient coverage ratio.
BBCA: BUY, TP at IDR16,000
Net profit was IDR17.3t (+5% YoY), in line with our IDR18.2t forecast.
Loans grew 12% YoY and the bank had previously indicated that NPL
might tick up to as high as 1% by YE15. But even at this rate, BBCA’s NPL
remains much below the industry’s average, and its rising provision
should ensure high coverage ratio. We maintain BBCA as one of our top
BUYs in the sector for its stable earnings and asset quality.
BMRI: HOLD, TP at IDR8,200
BMRI’s net profit stood at IDR20t (+1% YoY), in line with our IDR19.8t
forecast. Nonetheless, we remain cautious on its 2016 outlook
considering BMRI’s bigger exposure to corporate and SME business
compared to its peers and the fact that these segments are more
vulnerable to the recent slowdown in the economy. NPL is likely to
continue on an uptrend despite the bank’s aggressive loan restructuring
strategy in 2015.

BBRI: Growing micro business

Lower lending rates to attract higher demand
The Indonesian government is keeping its promise of providing affordable
productive loans by cutting interest rates on “Kredit Usaha Rakyat”
(KUR) to 9% in 2016. To a limited extent, we expect the new KUR to
cannibalize banks’ non-subsidized lending products, including the micro
credit offered by BBRI at 16-28% interest rates. However, margin
pressure in BBRI should be offset by its rising KUR volume, which could
also act as a source of low-cost deposits for the bank. Maintain BBRI as
our Top BUY with TP of IDR13,000 (12.4x FY16 P/E, 2.4x P/BV).
Lower KUR rate to help spur demand
Government is ready to unleash IDR10t in interest rates subsidy on KUR
for 2016 as part of its effort to boost Indonesia’s flagging economic
growth. The subsidy is nearly seven times what was spent in 2015. This in
turn will allow for 3ppt cheaper lending rates this year and is expected
to generate higher demand especially from the micro business people.
The total loan disbursement target is IDR100t vs. IDR23t achieved last
Non-subsidized loans might start to weaken
In 2015 we did not see any cannibalization in BBRI’s nonsubsidized micro
lending despite the 7ppt KUR rate cut. But things could be different this
time around as the interest rate gap becomes very wide. The shift,
however, will be limited by the strict requirement in KUR and to the
amount of loans available for disbursement.
Margin to remain strong on higher volume
Being the major player in the micro business, BBRI is set to cover 67% of
the 2016 KUR target. So despite the possibly slowing demand for its
higher yield products, we expect NIM to remain close to 8% vs. sector
average of 5.3%. Furthermore, the bank’s excellent risk control in the
segment should allow BBRI to keep provisioning to a minimum and
translate its superior NIM to an attractive 21% ROE.

BBRI: 11M15 results – in line with expectations

BBRI posted a small earnings growth to Rp22.7tr in 11M15, accounting to 93-
94% of the market and our expectations. The good operating income growth of
12% y-y was used to build up provisioning charges as well as funded the
operating expenses, which increased 42% and 15% y-y, respectively.
 Loans expanded 2% m-m in November. A significant increase in total loans
was recorded in November, leading to y-y increase of 12% compared to 11% in
October. We believe these new loans still came from non-SOE corporate as well
as the micro loans. Deposit growth weakened again to 6% y-y with LDR reaching
89% in November from 87% in October.
 NIM declined to 8.0% in November. The higher loan growth however, did not
translate into better margin, which was lower than 8.3% recorded in October as
the corporate loan rates are generally low. On the cumulative basis, NIM
declined to 7.8% in 11M15 from 8.4% in 11M14.
 Provisioning charges increased 43% y-y in November. The level of
provisioning however, continued to be lower from the previous month with
provisioning to total loans level declined to 3.2% in November from 3.3% in
October. This was attributed to the higher write off, estimated at Rp544bn in
November while total write off reached Rp6.5tr in 11M15.
 Operating expenses slowed with cost to income ratio declined to 40% in
November alone from 47% in October while the cumulative level still increased
to 44% in 11M15 from 42% in 11M14. We expect BRI to meet the market
expectations and we keep our BUY call with TP of Rp11,500.

Indonesia Banks: Growing with the economy

 Banks are expected to grow by 13% YoY in 2016, cautious in
disbursing new loans to keep NPL at ~3% by YE15 and 3.4% in
 We analyze banks based on four risk parameters. Our top
BUYs are BBRI and BBCA.
 Upside risk: monetary easing. Downside risk: government
under-delivering on 2016 budget realization.

Indonesia’s banks to grow with the economy
We expect Indonesia’s banks to grow along with the economy.
Lending capacity is not an issue, based on our estimate. However,
banks are likely to remain selective in disbursing new credit and
grow only by 13% YoY next year. This should help control new NPL
formation, and maintain the bad debt ratio at ~3% by YE15 before
slowly increasing to 3.4% in 2016 as NPL is a lagging indicator of a
country’s macroeconomic conditions. We believe credit quality, if
managed properly, should only be a temporary P&L issue and not a
structural balance sheet problem.

BBRI and BBCA stand out
Selective names, having been oversold, offer value and an
attractive 1-year return as we shift into 2016. Our analysis is based
on four parameters along the lines of NPL formation, as we believe
expansion needs to be of high quality to produce value. Each bank
under our coverage shows a different picture in loan quality, but
two names stand out among the crowd: BBRI IJ (BUY, TP IDR13,000)
and BBCA IJ (BUY, TP IDR16,000).

Key Risks
Our growth forecast is based on the premise that BI will not cut
the benchmark rate. Hence, monetary easing could be the event
that initiates the next phase of higher credit demand, while the
government under-delivering on 2016 budget realization will pose
as a downside risk to our growth forecast.

Bank: Asset Revaluasi

Bank Mandiri

BMRI saat ini memiliki nilai aktiva tetap yang dapat direvaluasi sekitar Rp 7 triliun dan setelah revaluasi nilainya dapat ditingkatkan menjadi sekitar Rp 45-50 triliun apabila menggunakan harga NJOP. CAR akan naik dari 17.6% per 1H15 menjadi di atas 20%. PPh yang harus dibayar sebesar Rp 1,1-1,3 triliun dengan asumsi tarif 3%.

Bank BRI

Manajemen  menilai ada aset Rp 2 triliun yang bisa direvaluasi menjadi sekitar Rp 8 triliun dan akan sedikit menaikkan CAR dari 20.6% pada 9M15 menjadi di atas 21%. PPh yang harus dibayar Rp 180 miliar. 

Bank BNI dan BCA

Belum ada penjelasan dari pihak Investor Relations. BBNI masih menghitung untung rugi dari aksi ini. BBCA dengan kecenderungan yang lebih konservatif saat ini dan strategi yang mengedepankan kualitas aset serta bukan merupakan bank pemerintah yang menyalurkan banyak kredit infrastruktur, diperkirakan belum begitu memerlukan aksi ini.

Baik untuk BMRI

Kami melihat BMRI akan sangat diuntungkan oleh revaluasi aset di antara bank-bank dalam coverage kami (BBCA, BMRI, BBRI, dan BBNI). Hal ini positif bagi BMRI dalam jangka panjang. Sebagai bank milik pemerintah, BMRI diperkirakan akan banyak menyalurkan kredit infrastruktur ke BUMN.


BBRI: 8M15 net profit below estimate

BBRI 8M15 net profit stood at IDR15.7t (+0.7% YoY), below our estimate (61% of our IDR25.7t FY15F) due to higher than expected provisioning expense. The high impairment, we think, is set aside to prevent NPL coverage from slipping below 140%. On the positive side, BBRI indicated that NIM inched higher to 8% on the back of strong micro lending, while total NPL stayed at 2.3%.

BBRI: NPL remains below sector average

Early indication of 8M15 shows that NPL stayed at 2.3% with high coverage ratio of 140%. Micro lending remains as the biggest support for asset quality and NIM, which we estimated to reach 8% by 8M15. An anticipated hiccup in NIM for Kredit Usaha Rakyat (government micro lending program) due to change in repayment scheme should not significantly affect BBRI’s earnings. Hence, we maintain our BUY call. Valuation looks attractive at only 1.8x forward PBV after share price went down 7% in the past 1 week.

BBRI: NPL remains below sector average

 Early indication of 8M15 shows no hiccup in loan quality. NPL stayed at 2.3%.

 Change in accounting method for new KUR might cause a temporary hitch in NIM, but not marginal. 8M15 NIM is 8%.

 Maintain BUY with TP at IDR13,500 (FY16F: 11.7x PER & 2.5x P/BV). Attractive valuation for high ROE.
Early indication for Aug 2015 suggests that BBRI’s NPL stayed at 2.3% with the coverage ratio unchanged at 140%. The biggest new NPL formation so far is seen in the private corporate segment with NPL of 3.3%, while SME still has the highest NPL ratio of 4.7%. Nonetheless, corporate and SME combined is still smaller than BBRI’s retail business which covers 50% of total portfolio with NPL of only 1.6%. With no hiccup in asset quality, BBRI’s net profit could reach IDR16t in 8M15, in line with our estimate.

Marginal NIM impact from change in KUR
One month after the start of the new KUR program in mid-August, BBRI has extended a total of IDR1.5t (vs. IDR20t for FY14). Under the current scheme, BBRI can only recognize the subsidized interest rates portion 3 months after disbursement. Hence, we expect a temporary period of lower NIM. However, the small contribution of new KUR to BBRI’s total loan means NIM hiccup will be marginal. Note that by 8M15 BBRI’s NIM had returned to 8% as the bank continues cutting its TD rate.

High ROE at a bargain
While pricing intervention from the government on KUR remains a risk, we think BBRI can still benefit from potential growth in its micro business market share. This will allow BBRI to maintain its attractive ~20% ROE for FY15-17F at current forward P/BV of only 1.8x. We maintain BUY with TP at IDR13,500 (FY16F: 11.7x PER & 2.5x P/BV).

Jul-15 loan growth: 9.5% y-y; deposit growth: 14.3% y-y

The Financial Services Authority (OJK) reported July 2015 loan growth of 9.5% y-y (Jul-14: 15.6% and Jun-
15: 10.2%), reaching IDR3,857tn with productive loans (+9.8% y-y) accounted for 72.4% of 7M15 total
loans while the remaining 27.6% were consumer loans. Separately, deposits grew 14.3% y-y in 7M15 vis-à-
vis 11.6% y-y a year earlier, bringing LDR flat at 89.1% in July 2015 from 89.1% in June 2015 and 93.0%
in July 2014.

4 SOE banks to receive IDR50t loan

3 of the SOE banks, Bank Mandiri (BMRI), Bank Negara Indonesia (BBNI) and Bank Rakyat Indonesia (BBRI) were each given USD1b loan with a 10 tenure by the China Development Bank. Bank Tabungan Negara (BBTN) received a 3 year maturity RMB5b loan or equivalent to IDR11.4t from PT Bank ICBC Indonesia. The interest rates on the loans will be LIBOR +2.8%. Bank Mandiri President Director Budi Gunadi Sadikin stated that the loan disbursement is part of CDB’s long term plan to give USD30b loans to support the country’s infrastructure and trade sector.

Indonesia market update: Economic stimulus package

Supply-side stimulus: First of three
On 9 September, President Jokowi announced the first of three economic
stimulus packages to counter Indonesia’s economic slowdown. The first policy
focus on three areas: (1) To support national industry competitiveness
through deregulations, bureaucratic reforms and law supremacy. The
president stated that 89 of 154 rulings would be amended or deregulated.
The government has also prepared 17 Government Regulations, 11
Presidential Decrees, 2 Presidential Instructions and other reforms; (2) To
accelerate the development of national strategic projects and; (3) To enhance
investment in the property sector.
Central Bank to continue focusing on financial stability
Agus Martowardjojo, the Central Bank (BI) governor, re-announced five BI
policies: (1) To enhance inflation management and real sector improvements
through supply-side incentives; (2) maintain IDR stability; (3) improve IDR
liquidity management; (4) strengthen supply-demand dynamics in the forex
market and; (5) continue financial deepening measures.
Economic Affairs Minister: 10 steps to improve the economy
Additionally, Economic Affairs Minister, Darmin Nasution, stated that the
government is taking 10 steps to improve the economy (exhibit 6). Most of
the new policies should have some impact on the supply side, especially the
fuel and gas price policy.
Positive over the medium term
In our view, the announced policies indicate that the government and BI
understand the importance of enhanced supply-side management by tackling
issues such as cattle price management, easing trade regulations, reducing
maritime industry dependency on diesel fuel and issuing inflation controls as
part of their programs. However, we see lack of measurements on aggregate
demand related stimulus, which we believe is necessary to jump start the
economy over the short term period. For infrastructure-related projects, while
we have seen some improvements of late, we still await for further
acceleration to materialize. Financial sector-wise, we think BI’s policy
reannouncement, especially on extending the tenors, suggests continued
commitment on maintaining financial stability, which is much needed
particularly given current external risks and volatilities.
Minimal impact on CTRP; Margin pressure for BBRI; Bad for PGAS
Mr. Jokowi also expressed his support on opening up foreign ownership to the
Indonesian property sector at above the IDR10bn (USD710k), causing
minimal impact for the property counters under our coverage (exhibit 7).
Note that only Ciputra Property (CTRP IJ-BUY-IDR382:TP:IDR790) has one
tower which caters to this extremely high-end market. Furthermore, the
government also announced the lowering for the People Business Credit
Program (KUR) rate from 22-23% to only 12%. With that said, for BBRI, we
expect some margin pressure on this lower rate for KUR, which would reach
19%, including the 7% government subsidy, compared to BBRI’s current
commercial micro lending rate at around 20-21%. Finally, Perusahaan Gas
Negara (PGAS IJ-REDUCE-IDR2,455-TP:IDR2,500) may be hurt by possible
lower gas prices in order to support some specific manufacturing industries.

New KUR : More benefits than woes

More benefits than woes from new KUR
BBRI has recently reoffered the revised KUR loan scheme (with target
disbursement of Rp17tr in 2H15 or 3.5% of total loans). For reference, under
the new scheme, micro KUR would have an effective lending rate of 19%,
whereby borrowing customers would pay 12% pa (and the govt pays an
interest subsidy of 7% pa). This is comparable with BBRI’s base-case micro
lending rate of 19.5%. Based on this, we think the impact from new KUR to
overall earnings would be limited. In fact, contrary to market belief, we think
new KUR could provide positive benefits for BBRI for the following reasons :
 Enhancing micro market shares. Admittedly there are risks of
canibalisation with BBRI’s existing micro loan product. However, the bank
targets more new micro customers and/or micro customers that are not
yet with BBRI. Indeed our recent meeting with one of the largest micro
lenders suggests approx 30% of its micro customers have “migrated” to
KUR micro scheme.
 Incrementally higher NIM. Based on our analysis, new KUR would
enhance BBRI’s overall NIM (See chart below). Assuming incremental
funding costs of 7% (vs existing COF of 4%), the implied new KUR NIM
would be 12%. This is higher than BBRI’s blended loan NIM of 10.7%, and
certainly well above retail and corp loan NIMs.
 Boosting Rp loan growth. Of late, Rp-based loan growth has been dismal.
We estimate that the bank’s YTD to Jul15 Rp-base loan growth to be
around 3%. We believe with new KUR, BBRI could see better growth.
Based on the above, we retain our LT buy rating on the stock.

BBRI: Giant at a bargain

► Initiate coverage with a BUY call and TP of IDR12,800. Having fallen
27% from its peak, Bank Rakyat Indonesia’s (BBRI) share price is now
trading at FY16F P/B of 1.8x, or around 1.5std below its 10-year
average of 2.6x. Our target price implies FY16F P/B and P/E of 2.3x
and 10.9x, respectively. Despite surrounded by unfavorable macro
condition, BBRI managed to maintain its position as one of the most
profitable banks in the country with an ROE of about 22%.
► Expect modest loan quality deterioration. BBRI’s NPL ratio, which has
been on the rise since early this year, may continue to be pressured
by the economic uncertainties. We assume a modest 50bps
increase in BBRI’s NPL ratio from end June 2015 level of 2.3% to 2.8%
at end 2015. BBRI’s loan profile is currently dominated by resilient
micro lending (32%) in addition to 11% lending to low-risk stateowned
enterprises (SOEs).
► Micro business to sustain lending growth. Micro lending is believed
to be less affected by current weak economic environment. In the
first semester this year, the segment still showed a relatively strong
15% YoY expansion. BBRI as the country’s major micro lender is also
benefited by the resumption of government’s micro loan programKredit
Usaha Rakyat (KUR), which offers more affordable lending
rate compared to the previous program.
► Improving banking infrastructure. BBRI has continuously invested in
its banking infrastructure, which is expected to attract more lowcost
deposit and generate fee-based income.

BBRI: 7M15 net profit inline with estimate

BBRI 7M15 profit stood at IDR13.7t, inline with our estimate. As expected, rising operating expense trend still continued in July, eroding growth of the bank’s net profit to only 1.5% YoY vs. 13.4% YoY for the net interest income. We also saw IDR1t tick up in provision in July, which could indicate that the increase in NPL is not significant. We estimate the ratio to remain below 2.5% in 7M15. Maintain BUY.

Indonesian Banking Sector: Reality bites

Potentially higher NPLs with increased provisioning in 3Q-4Q15 …
China’s recent currency devaluation has caused widespread concern on a possible contagion effect to other regions, including Indonesia. We expect the competitive devaluation to be unfavourable to Indonesian banks’ NPLs. Widening currency cost-to-income mismatches would increase margin pressures on debtors, leading to their inability to service debts. Moreover, low productivity and limited volume growth due to prolonged weakness in the economy has worsened the outlook across all segments. Our recent conversations with bank borrowers suggest that the prolonged unfavourable business conditions are likely to increase NPLs on outstanding bank loans. Thus, we believe that the banking industry may experience continued NPL pressure, not to mention under-provisioning for NPLs by some banks. This has encouraged banks to proactively restructure potential NPLs in the hope of preventing NPLs and capital deterioration. The industry (including BBCA) may experience a tough 2H15 as some NPLs are likely to be underway. In our model, we have conservatively assumed 2015 NPL growth to reach 2.6% (+70bps y-y). Note that we believe Indonesia is entering a vicious cycle of low confidence, which would mean a recovery is still a few quarters away.

… and lower 2015-16 loan growth targets of 10.2-11.6%
On the lending front, banks may become more cautious on lending due to the worsening industry outlook. Demand for loans is expected to remain soft unless there is increased foreign investors’ interests driven by optimism on government policies. Current weak commodity prices on a strengthening USD and minimal volume growth have also limited demand for working-capital loans, which accounted for approximately 65.4% of total productive loans and 47.0% of total outstanding loans at end-May 2015. For consumer loans, income tax enforcement, combined with deteriorating consumer spending power in 2015, has discouraged property purchases, leading to dampened mortgage growth, particularly in the primary market. Housing-related loans accounted for 17.8% of total loans as at end-May 2015. Given this scenario, we conservatively lower our loan-growth targets to 10.2% from 10.9% in 2015 and 11.6% from 13.6% in 2016. Higher 2016 loan growth assumes accelerated government spending.

Reiterate Neutral call; Lower TPs on all our stocks; Prefer big banks
Based on our assumption changes, we cut our 2015F earnings growth to nearly flat and forecast 10.8% y-y growth in 2016 (13.6% y-y previously). Excluding BBNI, we derive normalized earnings growth of around 9.6% y-y. Our lower earnings assumptions result in lower target prices for all our stocks. We are also lowering our rating on BTPN to HOLD from Buy. However, we retain our NEUTRAL stance on the sector as we believe that banks would be positively affected once the economy picks up. Our preference for big banks stands intact in the following order: BBCA, BBNI, BBRI and BMRI. Downside risks include a longer economic downturn, further IDR weakness and significantly higher external interest rates. Upside risks include supportive OJK policy and no government intervention (i.e., NIM pressure, as Indonesia arguably has the highest margins in the region, reflecting the industry’s high ROE).

Buy-back plans for ESOP to mitigate tax risks

Instruction from the top
Indonesia’s Minister of SOEs has signaled that 13 SOEs will spend at least
Rp10tr on share buybacks. The statement followed the planned relaxation on
buyback rule by OJK that would allow publicly listed companies to purchase
up to 20% of their total paid-in capital in an event of significant market
fluctuation without having to go through shareholders meeting. However, we
think at the most, buy-back would be upto 10% of total paid-in capital (as
stipulated in the corporate law). A number of SOE banks are considering the
buybacks; however, they have not yet given any official confirmations on
whether they will proceed with the plans.
Straightforward for BRI, potentially higher probability
The ongoing concern on the buyback relates to whether the relevant corps
could still retain their 5% corporate tax reduction. For reference, under the
existing regulations, publicly listed corps having 40% or more public floats
(and none having more than 5% stake) can enjoy these tax rate reductions.
While this is not a concern for BRI since its public float is currently at 43%,
BNI’s and Mandiri’s public float are at 40%; thus any buyback could reduce
public float below the 40% threshold, which would eliminate the corporate tax
benefits. Consequently, we think the buyback process should be more
straightforward for BRI, thus a potentially higher probability. The amount of
buyback is likely to be far less than the 20% allowable capital, especially as
buyback could temporarily reduce into tier 1 capital ratio. Also if the buy backs
are too large it could reduce banks’ liquidity positions. In any case, we don’t
expect the buy-back size would be more than 3-4% of total paid up capital.
Ways to mitigate tax risks from buy-back
To retain the tax deduction, we think BNI and Mandiri could explore
distributing the buyback shares (if they choose to do so) and gradually
distributing it as ESOP within 183 days (basically by end of Jun in the following
year). According to the regulation (PP No. 56/2015), as long as the banks’
public float does not fall below 40% for more than 183 consecutive days, they
could still enjoy the tax benefit. Another cut-off date that we observe is the
June 2016 audit date by the tax authority, which relies on Indonesian Central
Securities Depository input on whether the public float criterion is met. Still,
modification to the regulation is possible should the authorities opt to do so.
In our view, ESOP distributions in lieu of cash bonuses may be perceived
positively by market participants. Combined with decent operational numbers,
we continue to retain our Buy ratings on major SOE banks.


Financial Services Authority (OJK) has issued a regulation which enables public companies to do buybacks without having to obtain shareholder approval

Given the market volatilities, the Financial Services Authority (OJK) has issued a regulation which enables public companies to do buybacks without having to obtain shareholder approval. Based on balance sheet strength and free floats, we think the following companies have the capacities to do buybacks: ICBP, INTP, ITMG, KLBF, LPCK, PTBA, UNVR and WSKT. BBCA and BBRI also have the potential for buy backs due to high CAR’s. Note also 1) UNTR, RALS, and ACES are in net cash positions, but their float is slightly above 40%, meaning the buybacks to give up the 5% tax discount they are currently enjoying and 2) INCO has a strong balance sheet, but has to maintain 20% public ownership in order to comply with its divestment program.

Share buy backs may rise

 Companies with strong balance sheet are strong candidates
to do share buy backs. They include ICBP, INTP, ITMG, KLBF,
 BBCA and BBRI also have the potential for buy backs due to
high CAR’s.
The buyback program
The Indonesia Financial Services Authority (OJK) has issued a
regulation that enables public companies to buy back their shares
without having to obtain shareholder approval. There are two
conditions for the buyback program: 1) maximum shares to be
bought back is 20% of issued capital; and 2) minimum float is 7.5%.
Two factors
We analyze the companies’ ability to do buybacks based on two
criteria: balance sheet strength and the free float. Companies with
free floats slightly over 40% might not be keen to conduct
buybacks because they can lose the 5% tax benefit should the free
float fall below 40% post the buyback. Based on the two criteria,
our list includes the following ex-bank companies (all in next cash
positions): ICBP (BUY, IDR12,400), INTP (HOLD, IDR16,800), ITMG
(HOLD, IDR8,700), KLBF (BUY, IDR8,500), LPCK (BUY, IDR6,425),
PTBA (BUY, IDR5,475), UNVR (SELL, IDR37,100) and WSKT (BUY,
Strong balance sheet, but on the border line
UNTR (SELL, IDR17,275), RALS (BUY, IDR585), and ACES (HOLD,
IDR580) are in net cash positions, but their float is slightly above
40%. INCO (SELL, IDR1,250) has a strong balance sheet, but has to
maintain 20% public ownership in order to comply with its
divestment program.
Buyback for banks
We think BBCA (BUY, IDR11,625) and BBRI (BUY, IDR9,500) are good
candidates for the buyback program given their strong CAR of
20.4% and 19.0%) and high free floats (50.8% and 43.2%). BMRI
(BUY, IDR8,500) also has a high CAR of 17.6% but its float is 40%.

BMRI: Coming spike of bad debts

The fragile loan structure
All banks are undoubtedly affected by the late Indonesia’s slowing economic growth, rupiah depreciation, and the weakening debtors’ ability to service debts. From 2.5% industry’s NPL as of May 2015 (latest data), it is possible that industry’s NPL can soar to a higher level in 2H15. Nonetheless, we believe that the main driver of asset quality worsening in 2H15 is rupiah depreciation that force companies to experience ballooning foreign-currency loans’ interest expenses while in 1H15 the general weakness of economy that was accompanied by low commodity prices is the main cause. To determine which bank that has the highest possibility of undergoing major spike of NPL, we select three variables that can partly gauge banks vulnerability to the current condition. Those variables are proportion of foreign currency loans proportion, non-consumer loans proportion and mining related loans proportion. It turns out that as of June 2015 BMRI : 1) had the highest proportion of foreign currency loans (14.6%) among book IV banks and all banks under our coverage, 2) had the highest proportion of mining-related loans among book IV banks and all banks under our coverage (5.7%) and 3) had the highest proportion of non-consumer related loans (87.8%) among book IV banks and the second highest among banks in our coverage (only BBKP was higher). We choose mining as one of the variables as mining segment was the largest contributor of NPL among book IV banks in 1H15 and we believe the problem in that particular segment will be far from over in the second half. The reason why we think it is important to consider the proportion of consumer of related loans is that the effect of rupiah depreciation to consumption will be less direct than to companies with foreign-currency debts in their balance sheets.

NPL is understated, in our view
BMRI’s NPL only increased by 10 bps from 2.3% in 1Q15 to 2.4% in 2Q15, as the company still tried to undergo a major loans restructuring. However, given the current situation of rupiah depreciation, we think the 2.4% NPL ratio is a significant understatement. BBNI, with similar profile of loan portfolio experienced a jump of NPL ratio from 2.1% in 1Q15 to 3.0 % in 2Q15.

Rupiah, how low can you go ?
For the first time since 1998, rupiah has crossed Rp14,000/USD on the intraday trading on Friday last week. Year to date, the nation’s currency has lost 11.6% of its value against USD. It is difficult to judge how far we are from rupiah/USD bottom as the recent renminbi devaluation has altered the prevailing consensus of Fed rate hike’s timing, a major factor for the trajectory of USD.

Change to SELL and reduce target price
We downgrade our recommendation from BUY to SELL on the back of lower sustainable ROE assumption and higher NPL assumption that cut our EPS and BVPS estimates. Our calculation assumes 17.5% sustainable ROE (lower from 20% previously) and 14.5% cost of equity. The TP implies 2015-16 PB of 1.7-1.5x.

Indonesia Property: 2Q presales: More launches

· 2Q15 presales slower than in 1Q15

The property developers under our coverage posted slower QoQ presales in 2Q15 (-4% QoQ) as several developers had strong 1Q15 from the carry-over effect from launches in FY14. In aggregate, the property developers achieved 40% of their FY15 presales targets. Presales for industrial land in 2Q15 were slower as investors delayed their capex for investing in industrial land.

· Winners and losers regarding presales.

We are confident that SMRA, BSDE, LPCK and LPKR will achieve their FY15 presales targets from their project pipelines and 1H15 presales achievements. We are concerned about ASRI, CTRA, BKSL and BEST on their low presales and 2H15 project pipeline. ASRI and BEST has cut their FY15 presales target. We expect CTRA and BKSL to follow suit.

· 2H15 outlook: More liquidity from mortgages

With the LTV regulation being relaxed (ie. lower down payment requirement), we think buying sentiment in 2H15 will improve. Recently we learned that Bank Rakyat Indonesia (BBRI) is currently offering a short-term promotional product where new customers are only required to pay 10% down payment.


We maintain our Neutral call on Indonesia Property as we do not expect a sharp rebound in economic growth in 2H15. We like SMRA, BSDE and LPCK for their high presales in 1H15 and also because of their strategy to target the low-middle segment which is more resilient than the middle-high segment.

Banking: Post 1H15 Results – Combating the Problem Loans

 Banks reported -4% y-y earnings growth in 1H15 on weak loan growth of 10% y-y and higher provisioning charges, in
view of slow economic growth. Average NIM increased to 6.5% in 2Q15 from 6.4% in 1Q15 while average NPL increased
to 2.3% from 1.9% in Dec 14, and banks have been restructuring more loans. Maintain Neutral on the sector in which we
expect to see further increase in NPL.
 Net earnings growth of -4% y-y. The economic slowdown in 1H15 was seen in the weak result’s average net profit
growth having declined 4% y-y as compared to +5% y-y in 1Q15. The main reasons for the weak results are the continued
low loan growth and fee-based income, in addition to the rising provisioning charge problem loans, as the economy was
growing at a slower pace of 4.7% compared to +5.0% in 2014.
 Loan growth at 10% y-y. Loans started to pick up in 2Q as borrowers usually repay their loans in 1Q when businesses
start at a slow pace. Average loan growth was recorded at -1% YTD in March 2015 and this turned to +3% YTD in June
2015, indicating a pick up in lending in 2Q15.
 Total deposits growth weakened to 13% y-y. While the funds were still increasing higher than the lending growth, the
growth pace has been on the decline at 13% y-y in June 2015 compared to 15% y-y in March 2015.
 Improving average NIM to 6.5% in 2Q15 from 6.4% in 1Q15. Thanks to deposit rate reduction, most of the larger
banks, in particular BMRI and BBRI, saw marked improvement in net interest margins while BBCA and BBNI – which did not
compete in offering high time deposit rates – saw lower margin in 2Q15.
 Average NPL increased 20bps in 2Q15 to 2.34%. The biggest jump was seen in BBNI to 2.98% in June from 2.14% in
March. Three of ten banks recorded declining NPL level in 2Q15: BBTN to 4.70%, BJBR to 3.65% and BJTM to 3.82%.
 Restructured loans are increasing. On average total restructured loans increased to 2.7% of total loans in June 2015
versus 2.3% in March 2015 and 2.1% in December 2014. In absolute amount, restructured loans increased 31% YTD (72%
y-y) in June 2015 versus an increase of 37% during the whole 2014 and -47% in 2013.
 Neutral call in the sector, which is trading at an average P/BV of 2.1x and 1.8x for 2015 and 2016, respectively, before our
earnings forecasts adjustment. We keep BBRI as the top pick with TP of Rp13,000.

Indonesia Banks: 2Q15 Results Round-up

2Q15 results: Earnings dip

Earnings fall 11.6% y-y, bringing 1H15 contraction to 3.0% y-y
All 10 banks under our coverage have reported 2Q15 net earnings, dipping by 11.6% y-y and 17.8% q-q, bringing the 1H15 earnings contraction to 3.0% y-y (exhibit 19). However, if we strip out BBNI’s 2Q15 earnings growth of 4.3% y-y (vis-à-vis our estimate of 0.4% y-y). Although margins were generally lower y-y, we saw q-q improvement, mainly due to a better blended cost of funding on lower time-deposit rates and increased CASA to 58.3% from 56.9% in 1Q15 for the sector. The industry’s average NIM reached 6.9% vis-à-vis 6.7% in 1Q15, although it was still lower compared to 7.0% a year earlier. The 2Q15 total provisioning rose by 76.9% y-y, offsetting 9.8% y-y growth in pre-provisioning operating profit. Amongst 10 banks under our coverage, BBNI conducted book-cleaning, resulting in a 2Q15 net loss of IDR387bn, versus a profit of IDR2.54tn a year earlier. BMRI adopted a pre-emptive approach, restructuring debt of IDR21tn, or 3.8% of 2Q15 total loans, with more to come in 3Q15. Of all banks, BBCA posted top-notch earnings, with a gross NPL of only 0.7%.

Loan growth of 10.7% y-y and 3.3% ytd, with worsening quality
On the balance-sheet front, 2Q15 loan growth continued at a slower pace, up by 10.7% y-y and 4.8% q-q, bringing ytd loan growth to 3.3%. Corporate loans remained weak due to slow business activities and weak domestic consumption. The slowdown in loan growth led to a lower loan-to-deposit ratio (LDR) of 86.2% from a peak of 88.4% at end-June 2014. In addition, worsening loan quality was reflected in gross NPLs rising 32bps y-y and 20bps q-q (for the 10 banks) to reach 2.4%, driven mainly by SME loans and corporate loans related to the hard commodity industry. While manageable, gross NPLs were still on an uptrend, with 7 of 10 banks displaying worsening quality. BBCA still had the lowest NPL exposure of 0.7%, while BBNI booked the highest jump, up 84bps q-q to 3.0% (exhibit 21). Overall, special-mention loans remained on an uptrend, rising to 5.2% (+47bps y-y), with BBCA carrying the lowest at only 1.8%, mainly due to late interest payments on its consumer loans.

Reiterate Neutral sector call; all eyes on loan quality
We believe future bank results will depend on government changes in overcoming constraints on expediting infrastructure spending to stimulate the economy. The volatility of the IDR/USD rate, interest-rate movements and government policies should determine loan growth and quality. The decline in consumer spending and income tax enforcement (see our report dated 23 July 2015) should continue to pressure mortgage and auto demand. Thus, we conservatively assume 2015 loan growth of 10.9% y-y (vis-à-vis industry banking growth of 12-14% y-y) with a gross NPL of 2.4% (+50bps y-y) for the 10 banks under our coverage. Given the 2Q15 results, we retain our NEUTRAL stance. At the stock level, BBCA is our top pick, followed in order by BMRI, BBNI, and BBRI. For small banks, we continue to like BBTN and BJBR. Downside risks: slower economic recovery, further IDR weakness, significantly higher external interest rates. Upside risks: supportive OJK (Financial Services Authority of Indonesia) policy and no government intervention.

Tips trading hari ini, Selasa tanggal 04 Agustus 2015

Tips trading hari ini, Selasa tanggal 04 Agustus 2015 :
1. Penutupan IHSG flat -0.05% di level 4800, setelah fluktuatif naik turun range 4815-4774. Aksi beli pemodal asing masih menahan indeks net buy Rp 263.5M (bila termasuk pasar nego total net buy Rp 328M). Net buy asing terbesar di BBRI 263.6M, TLKM 84.7M dan BBCA 42.8M.
2. Kenaikan major banking BBRI, BMRI, BBNI dan BBCA masih mencoba mengakhiri trend turun jangka pendek. BBRI menguat naik hingga tepat tertahan di area 10425-10525, sedangkan BMRI belum mampu melampaui area resis 9850-10500, sedangkan reversal lanjutan BBNI masih terhalang area 4830-4850.
3. Kenaikan lanjutan properti lapis atas BSDE, SMRA berhasil mematahkan trend turun jangka pendek. SMRA breakout 1815, BSDE tembus 1815 hingga Close mengarah area 1870-1885.
4. Sebaliknya SMGR terjun bebas setelah tembus turun level psikologis 10000, Close di 9850 rentan breaking Low. ADHI bergerak fluktuatif, setelah kembali simpang siur berubahnya range harga right issue, waspada bila kembali testing support kuat 2150-2165.
5. Trend bearish jangka pendek masih membayangi IHSG yang belum berhasil tembus area 4825-4853. Reversal masih didukung major banking dipimpin BBRI, BBNI, BMRI serta properti lapis atas SMRA, CTRA, BSDE diharapkan berlanjut. Waspada bila BBRI gagal tembus resis yang akan menyeret turun perbankan lain.
6. Seperti kemarin, indeks diperkirakan fluktuatif range 4750-4826, masih rutinnya inflow pemodal asing menjadi sentimen positif, di tengah lonjakan inflasi bulanan Juli +0.93% di atas eskpekstasi konsensus.

Close>Open, belum mampu tembus MA20 di 4853 namun MACD ada potensi cross up petunjuk redanya trend turun
S: 4771, 4750 R: 4826, 4853

Indonesian Banking Sector: Slow-going

Although we believe the banking sector remains promising over the long term, short-term hiccups have emerged as banks struggle to grow loan portfolios in the midst of the present economic slowdown.

§ Continued weak mortgage lending on income tax enforcement: At a meeting last month with a tax consultant regarding the government’s sunset tax policy, we learned that tax officers apparently are aggressively enforcing individual personal income taxes based on asset portfolios owned, coming from property developers, leasing and insurance companies. This is likely to disrupt property demand, as over 70% of property buyers are investors who have the propensity not to report their property portfolios. This, coupled with high property prices, means that the 25% mortgage CAGR in 2009-13 is unlikely to occur in the next 2-3 years. Note that mortgages accounted for 9.3% of the sector’s loan portfolio as of April 2015 (exhibit 5).

§ Lower KUR lending rates to pressure micro loans: The planned implementation of lower government KUR (Kredit Usaha Rakyat) lending rates to 12% in 2015 and 9% in 2016 may dampen growth in micro financing and pressure the segment (refer to our Spotlight, 22 June 2015). Initially, KUR was only applicable to non-bankable debtors, defined as those who had never received bank credit. This has been amended to those who are currently not receiving working capital/investment credit lines from banks. As a result, this could cannibalize commercial micro lending, which currently enjoys lending rates of above 20%. Subsequently, we see possible margin pressure and slower commercial micro loan growth ahead.

§ Loan growth pending increased macro visibility: The worsening of SME loan quality has caused banks to be reluctant in aggressively expanding into the segment, while loans for investments have dwindled, as parties wait for government infrastructure projects to jump-start the economy. However, corporate loan growth must grow in tandem with SME loans in compliance with the Multiple Licensing Regulation, which requires banks to have at least 20% SME loan exposure to total loan portfolios by end-2018. Additionally, increased government policy risk has sidelined corporates from making investment decisions, particularly as lower purchasing power translates into limited requirements on working capital loans.

Outlook: Short-term pain, long-term gain
At this stage, we believe the banking sector faces challenges in growing profitability in 2015 due to: slow loan growth (Bahana 2015F: 10.8% y-y growth, 2014: 11.8%) and higher NPLs (Bahana 2015F: 2.7%, 2014: 2.2%). Thus, we cut our 2015F earnings growth by 6.3% (refer to our Spotlight, 8 July 2015), leading to 2015F earnings growth of only 5.7% y-y for the sector.

Recommendation: Retain Neutral sector call; Prefer BBCA and BBNI
Despite short-term pullbacks, we remain Neutral on the sector, with our large-cap investment preferences in the following order: BBCA, BBNI, BMRI and BBRI. Upside risks to our call are faster GDP growth and improving liquidity, while downside risks are worsening loan quality and tighter tax enforcements.

Indonesian Banking Sector: SOE banks: Worse-than-expected NPLs

§ Asset-quality assessment based on three areas: Based on Banking Regulation number 14/15/PBI/2012, there are three main factors utilized to evaluate loan quality: (1) Business prospects, which cover sector performance, including corporate governance and competitive industrial-related rivalries; (2) Financial standing, consisting of earnings quality, capital adequacy, cash flow and market-sensitivity risks; and (3) Ability to service debt, including interest and principal.

§ OJK plans to provide leeway to prevent NPLs: The Financial Services Authority (OJK) said recently that it planned to loosen asset-quality assessments by allowing banks to appraise debtor quality by focusing only on the ability to pay despite the potential worsening of the macroeconomic outlook in various sectors and weakening financial stability. Thus, banks have been encouraged to aggressively restructure loans to prevent them from becoming NPLs. However, unless macroeconomic conditions improve, bank NPLs may be understated going forward.

Outlook: New NPL measurements designed to limit earnings downside
This recent strategic move is to prevent NPLs from ballooning. The industry NPLs rose to 2.72% (including channelling) and 2.48% (excluding channelling) at end-April 2015, up from 1.91% and 1.77%, respectively, at end-2013 (exhibit 5). Special-mention loans rose to 5.31% at end-April from 3.87% at end-2013 (exhibit 6). Of the total NPLs, MSME/working-capital loans booked the worst loan quality, while NPLs for the consumer segment reached 1.63%, mainly due to mortgage-related NPLs of 2.26% at end-April 2015. Although these new NPL measures are meant to curb NPLs, banks that are too lax in providing credit lines may experience understated NPLs. Focusing on SOEs and first-quality debtors may be viewed as an alternative to prevent potential spikes in NPLs, although this may only be applicable to big banks that have the ability to take on lower-yielding assets. For the 10 banks in our coverage, BBCA had the most competitive 1Q15 blended cost of funding at 2.6%, followed by BBNI at 3.2%, BMRI at 3.8% and BBRI at 4.5% (exhibit 9).

Recommendation: Short-term pullbacks on worse-than-expected NPLs
In our coverage universe, BBCA remains the most prudent bank, with NPLs below 100bps. For 2015, we expect overall sector NPLs to worsen to 2.8-3.0% in 3Q-4Q15 before stabilizing. That said, we expect banks to experience increased provisioning charges, leading to dampened earnings. Moreover, slow loan growth has resulted in higher NPLs and lower interest income. BBNI appears to have experienced a massive deterioration in loan quality, resulting in poor 2Q15 earnings. We also expect this to occur to BBRI and BMRI, although to a lesser extent relative to BBNI. Thus, we expect 2Q15 banks’ earnings to be lower than in 1Q15, leading to major short-term corrections for the banking sector. While we maintain our Neutral sector rating, we slightly alter the order of our stock picks: BBCA, BMRI (third previously), BBNI (second previously) and BBRI. Upside risks: steady local currency movements and improved GDP growth, which would improve assets quality. Downside risks: understated NPLs further pressuring profitability ahead.

BANKING SECTOR : New LFR regulation

From LDR to LFR
Bank Indonesia, through new regulation of No. 17/11/ PBI/2015 states that banks can push their lending disbursement higher to reach 94% of their total funding (implementation will start in 1 August) before incurring a penalty of additional reserve requirement, an increase from the current benchmark of 92 % under the loan-to-deposit ratio (LDR) formula. Thus, the central bank changes LDR-GWM from 78-92% to the new LFR-GWM of 78-94%. The funding options have also been expanded (a change from LDR to LFR) to include medium term notes, floating rate notes and bonds that are issued by banks. Subordinated debt and any securities that have been purchased by fellow banks, however, are excluded from the list of funding options. Nevertheless, not all banks are automatically qualified to get the upper limit of 94% because they must fulfill certain criteria. The criteria require banks to have low non-performing loan (NPL) ratio of below 5 % for both total loans and loans channeled to the SME segment. Starting in February 2016, Bank Indonesia will also expand the criteria where only banks that have channeled minimum 5% of their total loan portfolio to MSME sector can push LFR to 94% without incurring a reserve requirement penalty. The penalty for the lower band of 78-94% LFR-GWM range is the additional reserve requirement of 0.1 x difference from the lower band x total deposit while for the upper band is 0.2 x difference from the upper band x total deposit.

The new rule and banks in our coverage
Using 1Q15 balance sheet as a guide, among banks in our coverage, only BTPN that will immediately benefit from the new LFR and LFR-GWM regulation. The bank’s LDR as of 1Q15 was 98.3% and its LFR was 90.5%. BTPN has met all the criteria for the new rule as the bank has : 1) Total NPL below 5% (total NPL in 1Q15 was very low at 0.8%). 2) MSME NPL below 5% (MSME NPL in 1Q15 was at 2.3%) .3) Channeling to MSME sector above 5% (The bank’s productive MSME’s loan portfolio was 26% of total loan). Meanwhile, due to loan quality criteria, BJBR possibly cannot reap the benefit from the new LFR-GWM regulation as the bank’s MSME loan is above 5% (micro NPL alone in 1Q15 was already 25.5%). BDMN, with its 94.7% LFR as of 1Q15, can easily reduce its reserve requirement, following the new rule should the bank able to decrease its LFR below 94%, a mere 70 bps from the upper band of 94%.

Will it be significant?
The new regulation can at least give banks more room to expand liquidity base as more funding options can be accounted as the component of new regulatory liquidity ratio (LFR). Under the previous regulatory LDR, banks can only account demand deposit, saving, and time deposit for the regulatory liquidity ratio, but currently other liquidity sources (such as already stated above) can be used by banks to be accounted as the new regulatory liquidity. However, we doubt that the new LFR regulation can significantly help banking industry to propel its loan growth as we deem the impact to be very limited (at least in 2015). All of the three Book IV banks, namely BBRI, BMRI and BBNI can easily maintain its previous LDR-GWM range of 78-92% in 2015 as loan demand is also weak.

McDonald’s Indonesia to enlarges its cashless payment service to support higher sales transaction

McDonald’s Indonesia to enlarges its cashless payment service to support higher sales transaction. Previously, McDonald’s has cashless transaction service only with Visa and Mastercard, BCA, BRIZZI Card (BRI). As of May 2015, McDonald’s adds more partnership with T-Cash Telkomsel, and Gift Card from Kartuku (EDC from PT Multi Adiprakasa). Currently, McDonald’s has 159 outlets in Indonesia, 45% of which are standalone.

Ten Indonesian big banks’ 5M15 net profit declined 4.2% YoY to Rp32.6tn (US$2.4bn)

Ten Indonesian big banks’ 5M15 net profit declined 4.2% YoY to Rp32.6tn (US$2.4bn). Among 10 banks, 4 banks generated negative 5M15 net profit growth. Those banks are Bank Rakyat Indonesia (BBRI -6.9% YoY NP growth), Bank CIMB Niaga (BNGA -91.7% YoY NP growth), Bank Danamon Indonesia (BDMN -62.1% YoY NP growth), and Bank Panin (PNBN -13.4% YoY NP growth). Yet, the other 6 banks experienced increasing 5M15 net profit. They are Bank Mandiri (BMRI +20.9% YoY NP growth), Bank Central Asia (BBCA +11% YoY NP growth), Bank Negara Indonsia (BBNI +4.1% YoY NP growth), Bank Permata (BNLI +56.87% YoY NP growth), Bank Tabungan Negara (BBTN +49.9% YoY NP growth), Bank Internasional Indonesia (BNII +55.4% YoY NP growth).

KUR revision preliminary update

Although not yet final, BRI has received a preliminary update regarding the
govt’s proposed KUR lending rate reductions. For reference, the government
proposes KUR lending rate of 12%. It will also provide an interest rate subsidy
of 7% for micro (previously not available) and 3% for retail. This should bring
effective LUR lending rates for the disbursing banks (such as BRI, Mandiri and
BNI) to 19.5% for micro and 15.5% for retail KUR products.
Almost no impact for BRI
We believe that if approved as above, the impact to BRI’s NIM would be very
small. This is because the effective micro KUR lending rate would be similar to
the bank’s latest unsubsidised micro lending rate of 19.5% (effective 1st July
2015). KUR can only be for first time borrowers, but beyond the KUR lending
period we think ex KUR customers would almost certainly stick with KUR
lending banks. BRI, the largest KUR lending bank, offers the most competitive
micro lending rates (ie the lowest in the micro space) which we believe has
been the main reason for BRI currently holding the largest micro loan market
share at 51% (from 49% in 2010).
Still maintain long-term Buy
While we think the bank may still face near term pressures given uncertainties
relating to KUR and/or tax disputes, we retain our longer term buy on the
stock. We think earnings risks, at least relative to our projections, should be
muted (for reference our forecasts are about 6% below consensus).


Indonesia Bank update: Growth & policy risks

Worsening loans quality + growth = lower earnings
Given worse-than-expected slowdown in GDP performance, we lower our overall loan-growth target to 10.9% y-y from 12.7% y-y, in line with most banks’ reductions in their 2015 loan growth targets to 12-14% y-y from 16-18% y-y. As of end-April, loans grew by 10.3% y-y to IDR3,735tn, translating to 1.0% growth ytd (vis-à-vis 2.0% a year ago). On top of the slower-than-expected loan growth, higher NPLs have encouraged banks to top up provisioning, applying pressures on earnings. Although we have anticipated these possible outcomes, our sense is that worsening developments are currently unraveling due to continued uncertainties on government policies across all sectors, including banking and importantly, infrastructure-related industries as well. As such, we further lower our earnings forecasts by an average of 3.4% in 2015 and 5.3% for 2016.

Proposed lower KUR lending rate may pressure margins
To support the low-end market segment, the government may propose lowering lending rates for Kredit Usaha Rakyat (KUR), a government-backed lending program for small and medium enterprises. The current program allows credit lines of up to IDR500mn for retail KURs and IDR20mn for micro KURs, with lending rates of 14-21%. The government is proposing a lower lending rate of 12% to facilitate liquidity support to banks at competitive rates and/or provide subsidized interest rates. This new scheme could lead to 200-300bps in margin pressures for banks upon implementation, based on our preliminary assessment. A decision on the proposal is expected in July with the government having allocated IDR30tn in KURs, expecting BBRI to be the lead contributor to this program (exhibit 5). The KUR scheme mirrors the current subsidized mortgage program. However, financing 462,000 low-end housing units under the government’s One Million Housing plan would require additional liquidity support, which currently is budgeted at only IDR5.2tn. As a consequence, the government is considering converting the program to an interest rate subsidy from the current Housing Loan Liquidity Facility (FLPP).

Reiterate Neutral with BBCA as top pick; lowering most TPs
Given these developments, we expect 2Q15 banks’ earnings to slow (exhibit 8) on limited loan growth and worsening assets quality. This, coupled with investors’ concerns on further policy risks (i.e. forced lower rates for infrastructure loans through state-owned banks), could result in further recent market underperformance (exhibit 3). On a brighter note, we anticipate a gradual pick-up in loan growth to peak in 4Q15, although we look for loan quality to worsen by 40-60 bps y-y in 2015. Hence, we lower earnings and most TPs accordingly (exhibits 7-8). Looking beyond this year, we expect an improved banking outlook in 2016 as the economy picks up, with GDP growth estimated at 5.3% y-y (2015F: <5.0% y-y), despite challenges in government intervention remaining. As we have not incorporated earnings erosions from proposed policies (e.g., non-taxable deductions for loan write-offs, new KUR scheme), the banking sector is a Neutral at best. Given the prospects of locally driven volatilities and external challenge from the Fed rate hike ahead, BBCA, arguably the most defensive bank is our top pick at this stage. Investors with greater risk appetite can also invest in BBNI, BBRI and BMRI in that order. Downside risks of our sector call include elevated interest rates to defend fund outflows on potential increased US Fed rates and continued government involvement in the sector. Upside risks are faster government expenditures leading to improved GDP, leading to faster loan growth with contained NPLs.

BBRI: Waiting for Government’s Remedy

 We cut our earnings on BBRI by 8% for 2015 and 2016 in view of lower loan growth and lower rate on KUR (22% to 21%). There is still a potential downside if the government will not give interest subsidy, which will lower NIM by up to 18bps. Trading at 2.1x P/BV 2015 we keep our Buy rating with a new TP of Rp13,000.

 Loan growth not as strong. On the back of the weak economy growth, BBRI is likely to see a lower loan growth than expected. Earlier in the year the bank expected 15-17% loan growth for 2015 and this is likely not to be reached. We lower our loan growth forecast to 13% from 17% for 2015 and to 16% from 18% for 2016 while the bank saw its total consolidated loans increasing to 10% y-y in March. Unconsolidated loan growth was still weak in May at 8% y-y.

 Lower rate on KUR with subsidy? The government has a plan to bring down interest rate on the people’s entrepreneur credit (KUR) to 12%. Based on the latest regulation from the Coordinating Minister of Economy #4/2015 issued on 13 May 2015 the micro KUR credit limit is set at Rp25m with maximum lending rate of 21% and tenor of two years for working capital loans and four years for investment loans. If the rate is cut to 12% we estimate the margin on KUR to go down to as low as 8.0% from 17.0% depending on whether the government will provide the funding and how much is the proportion between the bank and the government (several scenarios in Figure 7). There is also plan to subsidize the interest rates, which will have to go through the parliament’s approval first and hence will take longer for the implementation to start.

 Impact on NIM – down up to 18 bps. Micro loans in BBRI make up 33% of total loans in March 2015, with micro KUR estimate up to18bps decline in BRI’s NIM. There is a possibility that other micro loans, Kupedes, will switch to the government-sponsored KUR. However, this is not possible as total new KUR is set at Rp30tr for 2015; but we expect micro lending rates to decline.

 Earnings adjustment – BUY with new TP of Rp13,000 from Rp13,500. With the lower loan growth expectation plus lower NIM from KUR, we lower our earnings by 8% for 2015 and 2016. This results in lower ROE of 24% from 26% and leads to the revised TP of Rp13,000 based on the average P/BV of 2.5x for 2015-2016.

Government to lower SME & micro loan

The government plans to lower SME & micro loans from previously ~21% to 17% by 1 July 2015. Chief Staff Presidency Luhut Binsar Panjaitan stated that SME & micro loans has been charging a higher interest rate compared to consumer loans eventhough it has lower NPL compared to consumer loans. He expects the government to lower SME & micro loans up to 11% gradually. The government will subsidize banks which are willing to lower their interest rates to 17%.
Comment: Based on our channel check the lower lending rates will be applicable only for micro KUR, which is a government’s program to extend loans to low income people. The rate cut will affect BBRI which is appointed to be the sole distributor of the product, but only by -0.5-1% of 2015-16% assuming the lending rates to be set at 17%. We maintain our BUY call on BBRI with 12months TP of IDR13,500 (FY15F; 12.9x PER & 2.9x PBV), implying 32% upside potential.

Banks – Hopeful Of Stability In 3Q15

Our recent meetings with the management teams of Indonesian banks suggest that two key issues (tax deduction for written-off loans and lower lending rate for KUR loans) that triggered the sharp sell-down of bank stocks in mid-June may not be as negative as feared. Still, banks agree that such regulatory risks would unnerve investors and are signalling a downward revision in guidance, with the operating environment expected to stabilise in 3Q15.
¨ Sharp retreat in bank stock prices in past two months. Weaker-than-expected 1Q15 results sparked the first wave of selling of Indonesia banks (ID Banks) in late April, wiping out gains (in USD terms) of c.9% YTD. Two recent developments stoked fears of regulatory risks, resulting in a sharp sell-off and a YTD loss of 14% (in USD terms) in mid-June.
¨ Coverage under review. Although share prices have rebounded from the lows and valuation multiples have retreated below the historical mean in recent times (see Figures 1-6), we believe share prices could remain volatile between now and the 2Q15 results season in Aug 2015. Due to an internal reallocation of resources, we had our coverage on ID Banks suspended for the past year; currently our ratings and TPs are under review.
¨ Awaiting clarification on tax issues. In early June, the tax authorities issued letters of demand for back taxes, on grounds that written-off loans cannot be treated as a tax-deductible expense unless the borrower has a tax ID. Among large banks, Bank Rakyat Indonesia (BBRI) would be the most affected given its large base of micro customers, which tend to not have tax IDs. Based on BBRI’s guidance, we estimate the potential back tax payable would be a manageable IDR50m for every year of assessment. Banks are seeking clarification as the new ruling is in conflict with Bank Indonesia (BI) and Financial Services Authority (OJK) requirements for tax IDs being required only for loans above IDR50m.
¨ Limited impact from rate cut for KUR loans. There were also concerns over government intervention in market pricing in the directive for state-owned enterprise (SOE) banks to lower lending rates for Kredit Usaha Rakyat (KUR) loans to 12% from 22%. While full details are still lacking, BBRI which has 4% of total loans consisting KUR loans expects a manageable 20bps drop in NIM (1Q15: 7.57%). Bank Nasional Indonesia’s (BBNI) exposure to KUR loans is a small 0.9% of gross loans while Bank Mandiri’s (BMRI) exposure is a mere 0.3%.
¨ Banks signaled downward revision in targets. Given the much softer than expected GDP growth of 4.7% YoY in 1Q15, banks see the need to review their 2015 business plans that would be submitted to BI by end-June. Loan growth targets would be trimmed due to the slow pace of government spending and continued softness in commodity prices. Gross non-performing loans (NPL) ratios would be raised as NPLs are expected to edge higher in 2Q15 before stabilizing in 3Q15. Net interest margins (NIM) would likely be lowered as recovery in 2Q15 on the expected decline in cost of funds would not be sufficient to offset the compression seen in 1Q15. Although system liquidity has improved since early 2015, banks remain concerned over the Federal Reserve’s rate decision and the potential impact on the IDR and banks’ cost of funds.

BANKING: Intip cuplikan berita bank hari ini

Hari ini, setidaknya ada tiga berita layak simak dari industri perbankan nasional. Berita utama yakni perlambatan aktivitas ekonomi sepanjang tahun 2015 memaksa para bankir merevisi target pertumbuhan kredit tahun ini. Rata-rata pemangkasan berada di kisaran 200 basis poin dari target awal. Paling anyar, tiga bank BUMN yakni Bank Rakyat Indonesia (BRI), Bank Mandiri,  dan Bank Negara Indonesia (BNI) akan menurunkan target pertumbuhan kredit.

Berita selanjutnya, Menteri BUMN, Rini Soemarno mengatakan, dalam kunjungan ke China, pemerintah mencoba menjajaki peluang kerjasama antara bank BUMN dengan perbankan dari China. Salah satu skema kerjasama perbankan Indonesia dan China adalah join financing pembiayaan infrastruktur.

Ada juga berita tentang PT Bank Mandiri Tbk yang sedang mencari dana segar melalui rencana penerbitan sejumlah surat utang. Hal ini dilakukan Bank Mandiri untuk menutupi kebutuhan pendanaan jangka panjang. Akhir tahun 2015, Bank Mandiri akan menerbitkan KIK EBA senilai Rp 1 triliun.

Terakhir, ada berita tentang kenaikan rasio kredit bermasalah atau non performing loan (NPL). Irwan Lubis, Deputi Komisioner Otoritas Jasa Keuangan (OJK) mengatakan, rasio kredit macet perbankan bertambah 10 basis poin menjadi 2,5% per April 2015, dari bulan sebelumnya yang masih sebesar 2,4%.

BBRI to distribute all of Rp30tr KUR at 12% pa in 2015

 According to, the government has just decided in today’s cabinet meeting that BBRI will be the only bank to
distribute the government-sponsored people credit (KUR) for this year, totaling Rp30tr, at 12% lending rate. The
maximum credit for KUR is now set at Rp25m, up from Rp20m previously. This falls under micro loans, while the retail KUR
(Rp25-500m credit at 13% pa) is discontinued, as they can be served by the SME loan segment division in banks. Details of
the new KUR scheme is not yet available, whether the government will provide the funding for KUR in BBRI at low rate in
addition to the interest subsidy, which is set at Rp1tr for 2015. The loans are still guaranteed by two state insurance
companies, 80% for KUR to agriculture, maritime & fishery and small industry and 70% for KUR in other sectors.

 Implication to BBRI’s earnimgs – the implementation of the new KUR, which is expected as early as July is a bit too soon,
as we expect the parliament’s approval for the subsidy in the next revised budget. At the earliest we expect this can be
started in 4Q15. Given the low interest rates, expect some 20-25bps reduction in BBRI’s margin without any interest
subsidy for the Rp30tr additional loans under the scheme. While 33% of BBRI’s total loans are micro loans, we cannot
expect all of them to be converted into the lower rate KUR, due to the limitation of the government’s funding. The lower
interest on KUR will lead to around 4-5% earnings cut for the full year but given the share price weakness recently, we
keep our Buy call on the counter. We will review our numbers and TP for BBRI.

Banking system in Indonesia not in a critical stage

Banking system in Indonesia not in a critical stage. Banking stats published show the system has 20.98% capital adequacy ratio, 5.3% NIM and 87.6% LDR. NPLs are expected to increase but not reach 2009 levels. Currently NPLs are at 2.4%, below 4%. The acting head of the Deposit Insurance Corp (LPS) and Head of the National bankers Association expressed their view that the Financial System Safety Net bill be passed soon to protect against future crises which are unpredictable.

Lowering KUR rate

Govt’s KUR loan program lending rate reduction
Bloomberg reported that Indo govt and SOE banks have agreed to lower
lending rates for KUR loan program. For reference, KUR loans are the govt’s
lending program to provide funding for those that are not bankable. There are
two types of these KUR loans – retail (from Rp100-500m / US$7,500-37,500 in
ticket size) and micro (upto Rp25m / US$1,875). Our discussions with major
SOE banks suggest that the proposed KUR program has not yet been finalized.
At present, the discussion focuses on 1) lending rates, 2) subsidizing interest
payments, 3) subsidized funding scheme, and 4) insurance scheme (to cover
credit risks). The report in Bloomberg suggests that lending rate would fall to
12% from currently 16% (for retail KUR) and 21% (for micro KUR). We think
this is not easy to implement. But if approved, we think this could be similar to
FLPP scheme (for housing program), and the size of the loans is unlikely to be
significant. Consequently, we think risks to earnings would be manageable.
Limited capacity to intervene lending rates
We think that the govt does not seem to have much room to dictate lower
lending rates. After all, excess liquidity in the banking sector is not significant
(with ave LDR of abt 90%). This suggests that competition for funding will pick
up again when loan growth recovers towards 15-20% pa. This should drive up
incremental funding costs; making it hard to set too low lending rates. Indeed,
in one of our discussions, it appears that the govt would probably provide only
Rp2tr in subsidised funding. Eventually these banks may have to tap into
market for wholesale funding. When they do, investors will probably demand
higher yields from these banks because of lack of risk-based lending rates.
This in turn would mean that future govt’s loan program to be insignificant.
Near term headwinds
While we argue that govt related lending programs are not significant towards
SOE banks’ overall loan portfolio (see table below which showed an average
KUR outstanding of Rp36tr in FY2014 or approx 2.8% of loan outstanding with
BRI had highest KUR exposures of Rp25tr or 5% of its loan portfolio); we think
the recent news will most likely result into further underperformances for
major Indo banking stocks in the near term. Within the banking space, we
have argued that BCA should have least govt intervention risks given the fact
that its lending rates are lowest in the market at approx 10%.

More on Government cutting lending rates for small business

News on the government cutting lending rates for small business reemerge yesterday afternoon, causing banks’ stock price to collapse after a short revival in the morning. Based on our talks with BBRI, our view remains that the rate cut is limited to micro KUR, which is a government lending program for the low income people. We have highlighted this on our report: Bank Rakyat Indonesia – Low impact from KUR rate cut. Note that in 2014, BBRI covers 60% market share of the total KUR program. Up until last night, the banks and the government has not reached an agreement on the details for this micro KUR scheme. But looking at the changes that government made on its its other lending product, which is the subsidized mortgage (FLPP), we maintain our base case assumption of 2% downside risk to BBRI’s 2016F earnings.

Indonesia banking: Kredit Usaha Rakyat new scheme to be set

BBRI NIM is expected to be cut 15 bps in our calculation· Wakil Presiden Jusuf Kalla mengatakan bahwa pemerintah berencana untuk meluncurkan skema baru untuk pinjaman kecil (KUR – Kredit Usaha Rakyat), yang berhenti di November 2015 setelah melayani segmen berpenghasilan rendah dari bulan November 2007. Rincian skema baru belum tersedia tetapi kami berharap:

· Penurunan suku bunga dari 12%, saat ini suku bunga KUR (untuk pinjaman Rp500 juta maksimum) adalah sebesar 13%, dan mikro KUR (untuk pinjaman Rp20 juta maksimum) pada 22%.

· Pemerintah akan menempatkan dana di bank dengan biaya rendah (dalam kasus BTN untuk KPR bersubsidi itu adalah sebesar 0,3% pa).

· Kredit maksimum sekitar Rp25 juta.

· Dijamin oleh pemerintah (saat itu 70% diasuransikan oleh dua perusahaan asuransi negara).

· Risiko tertimbang aset diturunkan menjadi 50% dari 75%.

· Tiga bank untuk menyalurkan KUR adalah: BRI, Mandiri dan BNI.

· Berdasarkan skema sebelumnya, pangsa pasar BRI dalam penyaluran KUR adalah 63% (sejumlah Rp50,7 triliun yang beredar pada November 2014), Mandiri 19% dan BNI 7% sedangkan sisanya didistribusikan oleh 30 bank lain, sebagian besar adalah bank pembangunan daerah. Kredit rata-rata per nasabah sebesar Rp4,1 juta dengan tingkat NPL rata-rata 3,9%. (Riset Mandiri Sekuritas)

* KUR is a small portion of bank’s loans· Dari tiga bank yang memiliki eksposur terbesar, KUR BRI senilai Rp18,7 triliun per Maret 2015 menyumbang 11% dari total kredit mikro atau 3,8% dari total kredit. Kami memperkirakan bahwa Mandiri memiliki Rp7 triliun KUR, yang setara dengan 17% dari total kredit mikro atau 1,3% dari total kredit, sementara BNI memiliki Rp3 triliun, 19% dari kredit mikro atau 1,1% dari total kredit. Oleh karena itu rata-rata KUR menyumbang sekitar 13% dari total kredit mikro atau 2,2% dari total kredit di tiga bank.

* Impact on bank’s NIM – BRI is likely affected the most
Sehubungan dengan rincian skema baru belum tersedia, kami tidak tahu apa dampak dari skema baru untuk margin bank pada saat ini. Apa yang kami pahami adalah bahwa menjalankan kredit mikro KUR tidak murah meskipun marginnya tinggi.

Penyaluran KUR adalah padat karya, seperti mengunjungi pelanggan pada setiap hari, dan jumlah pinjaman sangat kecil, biaya operasional bisa setinggi 10% dari jumlah pinjaman. Selain itu, mereka mempunyai risiko kredit yang lebih tinggi, terutama untuk bank yang memiliki pengalaman dengan pinjaman mikro terbatas.

Oleh karena itu, bank setidaknya akan mematok bunga 12%, bahkan jika pemerintah menyediakan dana dan pinjamannya diasuransikan, tetap akan memberikan keuntungan minimal bagi bank, atau mungkin negatif setelah biaya operasional.

Kami memperkirakan dampak terbesar akan terlihat di BRI sebagai pemberi pinjaman terbesar di KUR. Sekitar 75% dari KUR saat ini adalah mikro KUR, dan dengan menurunkan tingkat suku bunga ke 12% dari 22%, bank akan mengalami penurunan net interest margin (NIM) sekitar 15 bps, dan batas bawah sekitar 3-4%.

Perseroan mematok NIM sebesar 8% tahun ini, dan dalam perhitungan kami memperkirakan biaya dana sebesar 4%, dibandingkan dengan biaya dana yang diharapkan senilai 0,5% untuk skema KUR yang baru. Oleh karena itu, bagian dari KUR baru akan menghasilkan 11,5% margin bukannya 18%. Untuk Mandiri dan BNI, mengingat ukuran mikro KUR mereka kecil, dampaknya tidak akan banyak, dengan rata-rata penurunan NIM sebanyak satu digit. Kami akan meninjau rekomendasi untuk bank, tetapi dengan koreksi harga saham baru-baru ini kami mempertahankan rekomendasi BUY pada BRI.