According to recent news (LINK 1), the government is looking to provide debt forgiveness for written-off loans. These would be particularly relevant for SOE banks, specifically for BBRI. In the past (2023), we have read a similar proposal to provide debt forgiveness for written-off loans. If approved, it is very likely only applicable to micro and small-scale loans (we do not think it will be for corporate and/or commercial loans).

While details of the proposal are still sketchy, in our opinion, this is possibly only applicable to those written-off loans with an aging period of 5-10 years (and not for recent write-offs). In our opinion, these could be one-offs to minimize risks of moral hazards. The immediate impacts on banks from the proposal (if implemented) will be muted. After all, banks have already written off these loans. In addition, chasing payments from such loans (i.e. low nominal amount per borrower) would be uneconomical. If approved, these would provide opportunities for such borrowers (small and micro) to seek bank financing again. After all, small and micro enterprises have been pillars of economies in these segments.

Longer term, in our opinion, a more important regulation for SOE banks would be separation of SOE banks’ assets from state assets. At present, SOE banks have been reluctant to divest their written-off loans at discounts to their respective face values. As of 1H24, we estimate total accumulated written-off loans at major SOE banks (BMRI/BBRI/BBNI) stood at ~IDR300tr (implying ~8% of total outstanding loans or ~40% of total outstanding equities). Assuming a small 15-20% recovery rate from these written- off loans, it would be meaningful for these banks if they, either: 1) increase their respective legal lending limits; or 2) multiplier impacts to increase their respective loan portfolios (we estimate to be in the tune of ~5-10x depending on the risk weighting of respective banks).

On the flip side, concerns from market participants would be risks of moral hazards. However, as we have suggested above, we think the government/regulator could set parameters such as minimum aging periods of such written-off loans as well as one-time-only forgiveness that would determine eligibility for such forgiveness. Ultimately, we think the decision to provide forgiveness should be borne by the banks’ management team.

Nevertheless, we remain selective in our banking stock preferences as we see near-term concerns on the sector is primarily related to limited liquidity. This would mean elevated funding costs despite the recent BI benchmark rate cut to 6.0%. Our top pick in the Indonesian banking sector remains BBCA (in the conventional space) and BRIS (in the syariah space).

Valuations and risks

BBCA IJ (Buy) — We derive our TP of IDR13,200 using DuPont analysis with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 0.8x and a CAR-adjusted ROAE of 24.5%. Our TP implies 5.4x FY25F P/B (vs current price valuation of 4.2x) and 26.9x FY25F P/E (vs current price valuation of 21.0x). Risks are worsening economic trends, tighter liquidity competition, and/or higher credit cost and opex growth.

BMRI IJ (Buy)— We derive our TP of IDR8,450 using DuPont methodology. Key parameters are a risk-free rate of 6.5%, an equity risk premium of 7.8%, a CAR-adjusted ROAE of 19.8% and beta of 1.03x. We have also used 2025F book as reference. Our TP implies a 2.5x FY25F P/B and a 12.4x FY25F P/E – compared to current price valuations of a 2.1x and a 10.6x, respectively. Key downside risks are worse-than-expected macroeconomic trends, government intervention, tight liquidity competition, and higher credit cost and opex growth.

BBRI IJ (Buy)— We derive our TP of IDR6,300 using DuPont methodology, assuming a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 10.0%, beta 0.8x and a CAR-adjusted ROAE of 18.0%. We also use 2025F book as reference. The implied multiples at our TP are 2.9x 2025F book and 14.8x 2025F earnings (compared to current multiples of 2.0x and 10.7x, respectively). Key risks to our view are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition (which would increase funding cost), and worsening credit quality (which would raise credit costs), and higher opex.

BBNI IJ (Buy)— We derive our TP of IDR6,600 based on a DuPont analysis, assuming a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 8.5%, beta 1.0x and a CAR-adjusted ROAE of 16.5%. We also use 2025F book as reference. The implied multiples at our TP are 1.4x 2025F book and 10.7x 2025F earnings (compared to current multiples of 1.2x and 9.3x, respectively). Key risks to our view are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition (which would increase funding cost), and worsening credit quality (which would raise credit costs), and higher opex.

Fig. 1: Major banks accumulated write-off

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Nicholas Santoso (nicholas.santoso@verdhana.id)

Erwin Wijaya (erwin.wijaya@verdhana.id)