Indonesian Banking Sector - YTD Aug-24 Summary

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YTD Aug-24 Summary

Major Indonesia banks (BBCA/BMRI/BBRI/BBNI) have published their bank-only Aug-24 results, which broadly showed some earnings stability (and thus improved earnings visibility). Specifically, funding costs have stabilizes (although liquidity in the banking system stays tight). Indeed, the average monthly cost of funding (CoF) of these major banks has been hovering at ~2.6% (p.a.). With stable funding costs, we expect more stable net interest margins (NIMs) for these banks, which would make better core earnings visibility (i.e. PPOP). And alongside potential large net maturing SRBIs in 4Q24F (approximately ~IDR80tr), we anticipate some liquidity injection in the banking sector. Combined with likely BI rate cuts, we think the funding costs of major banks could remain stable. As of Aug-24, the average monthly NIM of major banks continued to show a stable trajectory of 5.4%, from the low of 5.0-5.1% in Feb-2024/Apr-2024. These should provide some earnings improvement for these banks, thereby reducing downside risks. If stable funding costs are sustained and considering the loan growth trajectory, NII growth would improve (and thus better earnings trends without having to drive down cost of credit [CoC]).

Based on the results of these major banks, BBCA and BMRI continue to be our preferred banking stocks. Both BMRI and BBCA have continued to see superior loan growth (primarily driven by their corporate customers as well as better funding costs, particularly for saving deposits). Indeed, YTD Aug-24, BMRI in particular has demonstrated most visible growth in current account and saving deposits. These suggest that its successful strategy to capture business downward value chains with low funding costs.

We also think that BBRI may see its earnings bottom out (despite credit costs remaining elevated). The bank has also kept a prudent provisioning approach to reduce credit risks at its mass-market (micro) segment as well as bringing down micro loan growth to a healthy mid-single digit percentage. A key challenge for BBRI is extremely slow deposit growth at its micro / ultra micro customer base. Our assessment suggests that much of these could be due to leakages in deposits whereby after loan disbursements, BBRI’s micro borrowers may have to pay their obligations (for working capital purposes) which resulted into deposit outflow. Thus, the key challenge for BBRI would be how to capture upward-value chains of its micro ecosystems, which in our opinion may require the bank to expand its corporate loan exposures. Meanwhile, expected BI rate cuts bode well for BBNI and BBRI given that they have proportionally more fixed rate earnings assets than BBCA and BMRI.

Summary of YTD Aug-2024 results

Below is a summary of major banks’ YTD Aug-24 results. While we still see largely tight liquidity in the banking system, we have seen a more stable funding cost trend (hence NIMs). While still in early days, we think near-term funding costs could remain largely unchanged, and these could become near-term earnings drivers for banks.

1. YTD Aug-24 net interest income from major banks +3% y-y

BBCA +9% y-y
BMRI +4% y-y
BBRI +3% y-y
BBNI -7% y-y

2. YTD Aug-24 PPOP from major banks +10% y-y

BBRI +16% y-y
BBCA +12% y-y
BMRI +7% y-y
BBNI -5% y-y

3. YTD Aug-24 CoC for major banks at 1.5% (+10bp y-y)

BBRI CoC of 3.4% (+900bp y-y) — as BBRI is writing off NPLS in small and/or micro segments. We think 4Q24 CoC to dipped below 3.0%; bringing FY24F CoC to be ~3.2%
BBNI CoC of 1.0% (-40bp y-y)
BMRI CoC of 0.8% (flat y-y)
BBCA CoC of 0.2% (-20bp y-y)

4. YTD Aug-24 implied risk-adj NIM for major banks at 4.1% (+20bp y-y)

BBCA 5.7% (+10bp y-y) as NIM @ 5.5% (+30bp y-y)
BMRI 3.8% (-30bp y-y) as NIM @ 4.6% (-40bp y-y)
BBRI 3.2% (-90bp y-y) as NIM @ 6.6% (flat y-y)
BBNI 3.0% (-10bp y-y) as NIM @ 4.0% (-50bp y-y) due to persistent loan mispricing but higher funding costs

5. YTD May-2024 profits for major banks +7% y-y

BBCA +14% y-y
BMRI +6% y-y
BBNI +4% y-y
BBRI +4% y-y

On balance sheet, loan growth was up +11% y-y; +5% YTD Aug-24; for BMRI +21% y-y / +12% YTD Aug-24; for BBCA +16% y-y / +7% YTD Aug-24; for BBRI +0% y-y / -2% YTD Aug-24; for BBNI +9% y-y / +3% YTD Aug-24.

On deposits, overall deposits were up 8% y-y / +0% YTD Aug-24; for BMRI +14% y-y / +5% YTD; for BBRI +7% (+0%); for BBCA +4% (+2%); and for BBNI +4% (-7%). A closer examination shows that the more important Saving Deposits (than Current Account or Time deposits) still recorded healthy growth of +5% y-y (+3% YTD Aug-24) with BMRI posting the highest growth of +19% y-y (+2%) / BBCA +5% (+5%) / BBNI +7% (+4%) / BBRI +2% (-2%). These explain that among the major banks, BBCA / BMRI / BBRI show the most stable NIMs. Headline LDR for these banks remained at 87.5% in Aug-24 (a slight uptick from 84.1% in Dec-2023) with both BBNI and BMRI at 95.3% and 96.8% respectively – suggesting funding cost reductions for the sector to be unlikely significant.

Valuations and risks

BBCA — 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 — 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 — 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 — 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.