Sunday, June 5, 2011

Banking Sector - Deserve to be traded at premium

by Samuel Securities

We believe Indonesian banks deserve to be traded at premium compared to regional banks mainly due to the superior return on asset (ROA). Compared with return on equity (ROE), we find return on asset has the most influence to price to book value of bank (correlation 93.3% vs ROE 80.2%). As of 1Q11, ROA of Indonesian banks reached 2.6% far or above average of regional banks at 1.2% with PBV’11 2.88x compared to regional at 1.61x. Although Indonesian banks has been traded premium compared to sector, we believe Indonesian banks are still undervalued and according to regression analysis using ROA 2.6%, showed that Indonesian banks’ fair value will be at PBV’11 2.94x.

NIM driver strong profitability

Indonesian banks offer strong profitability (ROA and ROE) mainly driven by high net interest margin (NIM). On average NIM of major banks in Indonesia is 7.3% compared to regional average of 2.9%. Indonesian banks offer high NIM due to:

 High inflation. Indonesia’s inflation reached 6.96% on FY10 compared to regional 3.4%.

 High risk premium. Indonesia’s risk premium reached 4.1% compared to regional 1.4%. The high risk premium is represented by high spread between yield of Indonesia Government Bond and US treasury.

 Low loan penetration. Indonesia loan to GDP is one the lowest compared to regional (28% vs regional 85%). Statistical data indicates that the total number of MSME throughout Indonesia is approximately 48 million business units and only a mere 35% of that figure have access to banks.

Indonesia banks maintain strong ROA In terms of cost to income ratio, Indonesia also slightly discounted to regional (46% vs. 51% regional). But cost to income ratio is not a good variable valuation because low cost to income does not necessarily offers high return on asset and vice versa. In Indonesia, cost to income continues to improve from 53.4% in FY05 to be 46% on 1Q11 and NIM relatively flat at 6.8% from FY05-1Q11.

As a result, Indonesian banks average ROA is still solid at 2.6% in 1Q11. With high inflation, high risk premium, and low loan penetration, we believe Indonesian banks will continue to offer strong NIM. Meanwhile, cost to income still has room to improve mainly due to the implementation of PSAK 50 & 55. Under new PSAK, recovery loan will be recognized as fee income from previously additional of outstanding. ROA will also improve using new PSAK because of the income from recovery and also from low provisioning. Under new PSAK, banks must set provision as much as objective evidence (from previously 0% x current; 5% x special mention; etc). Meanwhile, some of regional banks have implemented this accounting standard before Indonesia.

BMRI and BBRI on stock picks.

We maintain BMRI and BBRI as our stock picks at target price of Rp8,300 and Rp7,600. There is no change on forecasts and target prices. BMRI continues to improve cost to income level from 55.2% on FY05 to 37.6% 1Q11 and NIM enhanced from 3.7% to 5.1% and ROA was enhanced to be 2.5%.

Portfolio of small, micro and commercial loan was enhanced from 24.18% on FY07 to 29.15% on 1Q11, on the other hand, portfolio of corporate loan decreased from 47.10% on FY07 to 41.76% on 1Q11. This is a positive achievement because; 1) Historically, majority of nonperforming loan came from corporate loan and 2) small, micro, and commercial gave high interest rate compared to commercial and corporate loan. Meanwhile, cost to income can still be improved by enhancing on transaction on electronic channel which gave low cost to company. BBRI also continues to improve cost to income and maintain strong NIM. Cost to income declined from 53% to be 37%. But both BBRI and BMRI are being traded at discount to BBCA which is trading at 4.5 PBV (at ROA’11 2.8x).


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