Indonesia Banks:4Q results to drive the stocks higher
Bank Rakyat will kick-off the 4Q reporting season on 26th January, after market. We expect these results and the accompanying guidance to drive the sector higher.
Rakyat and BNI are our top picks. Three points to note:
1. Shift in yield curve: The long end of the curve has already moved down, with JPM’s rates team forecasting 6.5% for 10Y in the next few months. This isvery positive for bank stocks, in our view. The recent suggestions from policy makers regarding greater flexibility on inflation, and consequent read-throughfor short rates, are not yet fully appreciated. Our discussions with clients over the last few days suggest that consensus is still expecting BI to remain on hold,with some quarters expecting tightening. The probability of an easing bias is not being considered widely. This opens an opportunity for investors to buildpositions in stocks of large banks.
2. Potential cap on lending rates: This worry has been limiting the moves in stock prices of large banks recently, which we believe are not warranted. Therehas been recent news flow (Bisnis) on the government’s plans to lower interest rates for low-cost housing to 5% from 7.25%. None of the JPM-covered bankshave any meaningful exposure to this segment. Moreover, the discussion of direct lending caps for segments such as micro misses a key point – any cap at ratesabove 28% will have limited impact on Rakyat. We have a rather simple view here: Rakyat operates in the "prime" segment of micro. Hence, the rates thatit charges and the credit risk that it takes are lower. Some of the other banks are in what we would term as the "sub-prime" micro segment, whichnecessitates higher yields. If anything, this segment may attract caps, with limited impact on Rakyat, in our view.
3. Growth pick-up: We expect the loan growth guidance to move up to mid- to high-teen levels, with greater comfort around liquidity, LDR and NPL. Thesewill lead to positive earnings revisions by the Street, leading to a firming up of bank stock prices, in our view.
4Q earnings preview
Bank Rakyat (OW, Rp13,000): We expect Rakyat to report net income of Rp6.8 trn (up 5.6% q/q and 15% y/y). This increase should primarily be driven byseasonally stronger non-II flows and lower operating costs. We expect net interest income to remain broadly flat as margins contract by 21bps q/q. 4Q tends to beseasonally strong for Rakyat, but we have factored in 137bps of credit costs and 29bps of new NPL formation during the quarter on expectations of cashflowweakness at borrowers.
Bank Negara (OW, Rp6,700): We expect BNI to report net income of Rp2.6 trn (down 2% q/q and up 4% y/y). We expect volume- and margin-led net interestincome growth. Non-II should come in higher driven by fee income. However, we expect higher operating costs (+17% q/q) due to seasonality. The relativelylower valuations are partly due to perceptions pre-turnaround franchise, which are changing. Recent appointments at SoEs allay worries on BNI managementchanges, in our view.
Bank Danamon (N, Rp4,300): We expect Danamon to post net income of Rp666 bn (up 8% q/q, down 36% y/y), driven by higher NII, but partly offset bylower non-II and higher credit costs. Look out for margin expansion on the back of OJK regulation capping deposit rates in October last year. The bank is in theearly stages of a turnaround, with a focus on cutting costs and building CASA. While the cost rationalization is reflected via flat opex for four consecutivequarters now, CASA improvement is yet to come.
Bank Mandiri (N, Rp 11,500): We expect Mandiri to report net income of Rp5.3 trn (up 9% q/q but down 2%y/y). Higher q/q earnings should be driven byvolume growth and margin-expansion-led NII growth, and higher non-II. This should be partially offset by higher operating costs and credit costs. We think apick-up in capex, both by private and SoE corporates, should benefit Mandiri the most in the sector.
Bank Central Asia (N, Rp 12,500): We expect BCA to report net income of Rp4.3 trn (down 1% q/q but up 10% y/y). Higher net interest income and non-IIshould be outweighed by seasonally higher operating costs (+14% q/q). The stock is trading at 3.62x FY15E P/B vs the sector average of 2.28x. The bank’ssuperior credit underwriting, low LDR, high CASA and resulting RoE premium have supported these valuations. From here, the bank’s ability to move up LDRsand navigating the NIM/growth trade-off will determine valuation sustainability, in our view. The key risk for the stock, we believe, is a sharp decline in thecoverage ratio of 290%, as even a small move in NPLs (0.50%) would lead to large swings in cover.