Wednesday, March 2, 2011

Cherry-picking Time - Bank Sector

by CIMB Securities

Stock selection. With expectations of slightly improving bond yields, unlike the drop in 2H10, we advocate stock selection, which is a change from wholesale sector exposure as in 2H10. We favour Danamon, BTN and Mandiri, while downgrading Rakyat to Neutral from Outperform.

BDMN - Bank Danamon: optimising ROEs. Growth has resurfaced for Danamon, after its consolidation in 2008-09. In 2010, the bank’s loans grew 31% yoy vs. -5% yoy in 2009. Trading below its optimal historical valuations (current 2.5x vs. historical peak of 4.2x forward P/BV) and given its current sub-optimal ROEs, we see upside for valuation, as the bank resumes growth and normalises its balance-sheet leverage. Danamon’s current ROE of 15.6% is a far cry from its 2003-07 levels of 20-30%. With its ROA now recovering above 2.4% on the return of growth, the next thing it needs to do is to optimise its balance-sheet leverage. After its 2009 rights issue, its asset/equity ratio has come down to 6.4x from pre-rights of 9-10x. Target Rp 9,000

BBTN - Bank Tabungan Negara: boosting NIM with BTN Shop. In early 2011, BTN introduced its BTN Shop for white/brown consumer goods lending, which yields 14-15%, versus its commercial mortgages’ 10%. Once the bank has fined-tuned its products, we believe that expansion could be swift, as BTN cross-sells to its mortgage borrowers. After paying principal instalments for 2-3 years, mortgage borrowers have room to top up their loan balances using the same house collateral, as house prices normally grow by 8-9% p.a. The impact of rising rates on its NIM should not be severe, in our view. Cheap funding from the government, which is priced at a fixed 0.5% p.a. and could go as high as Rp5.7tr for 2011, should alleviate BTN’s funding risks. With sufficient liquidity, given our expectations of ample sector liquidity, we expect BTN’s loans to grow 25-27% p.a., outpacing the sector’s 20-22% in 2011. Target Rp 2,700

BMRI - Bank Mandiri: playing its scale benefits well. After its successful Rp11.7tr rights offering in Jan 11 that has boosted its CAR to 17.4% from 13.3%, Mandiri could grow faster, backed by its comprehensive business coverage. As the largest bank in Indonesia run by prominent bankers, Mandiri should play well its scale benefits well, warranting our pick as a proxy for the Indonesian banking sector. Target Rp 7,750

BBRI - Bank Rakyat: capital constraining growth. Rakyat’s 13.5% CAR can only support another two years of loan growth, in our simulation, assuming its historical 25% loan growth p.a. Raising equity seems to have met a dead end, as the government appears unwilling to inject more equity in any rights issue or dilute its 56% stake, the lowest among state banks. Recall that Mandiri and BNI’s rights issues were successful, as the government’s stakes had been 67% and 73% before the offerings, high enough for dilution to some 60%. As issuing sub-debt will not solve the bank’s capital problems (based on Basel III requirements), we believe Rakyat would sooner or later cut its loan-growth target and/or slash dividends. Target Rp 6,250

Main risk is liquidity. With expectations of ample sector liquidity in 2011 spilled over from global liquidity, we do not foresee big NIM contractions, despite potential rate hikes. Strong loan demand from fast-rising GDP and the commodity upcycle should most likely be absorbed by banks. Hence, the main risk to our sector call is a drying up of liquidity, as in 2008, which could shake public confidence and trigger bank runs.

Valuation and Recommendation

Maintain Overweight. On limited downside risks from bond-yield movements and potentially strong loan growth in 2011, we maintain our Overweight position. Valuations have come down 14% from their peak, increasing the sector’s appeal. The sector is now at 12.6-10.4x CY11-12 P/Es (excluding the pricey BBCA), cheaper than the market’s 13.5-11.2x.

Combined P/BV eased to 3.1x. Driven by the bond rally, banking stocks charted a new high of 3.8x forward P/BV in Nov 10 vs. their previous peak of 3.6x in Nov 07. Along with the steep rise in bond yields, their valuations have eased to 3.1x, back to the level in Jul 10. Upside for P/BV valuations may not be as much as in 2H10, in our view, which is why we are focusing on stock selection. We choose Danamon, BTN, and Mandiri, whose growth is likely to outpace peers’

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