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Tuesday, December 27, 2011

Banking Sector - All eyes on liquidity measures

by Bahana Securities

Globally, liquidity now takes center stage, and testimony to this was the Fed’s move to lower cost of dollar financing through swap arrangements in several countries, including USA, Canada, England, Europe, Swiss and Japan. Elsewhere, China has lowered its reserve requirement ratio by 50bps to support liquidity.

Closer to home, Indonesia’s central bank, to ensure liquidity, has cut its benchmark interest rate by 50bps to a record setting low of 6%, taking advantage of low inflation environment. Note that November 2011 inflation recorded at 4.15% y-y or 3.17% ytd.

Outlook: Higher LDR to lead to potential asset remix

Although we believe that there will be no quick fix for the Euro debt crisis, this recent move led by the Fed has provided some confidence on banks’ liquidity and currency price stability.

Domestically, BI has discouraged banks from carrying out foreign denominated lending facilities while aggressively promoting IDR loans by providing competitive interest rates under easing monetary condition.

However, the recent cut in the benchmark rate may arguably not become effective as LDR continues crawling up to 83% at end-Sep 2011 from 79% a year earlier while incorporating undisbursed loans worth IDR623t would raise LDR up to 107% (hypothetically). Stripping out BBCA, our calculation suggests LDR of 86.1% and 110%, including undisbursed loans.

It is interesting to note that aggregate industry loans only accounted for 69% of 9M11 earnings portfolio worth IDR2,109t, followed by liquid BI and government papers at 25.8%. This would provide flexibility for banks to remix their earnings assets portfolio, leaning towards high-yielding loans, while third-party funding should grow 15% on solid GDP growth.

Recommendation: Stay with liquid banks - BBNI, BBRI & BBCA

Liquidity could become a problem for banks as loans continue accelerating, growing at 24.8% y-y at end September 2011. Additionally, the widening spread between BI rate and LPS’ rate reflects the need for flexibility in pricing third-party funding. That said, we advise investors to stay with banks with ample liquidity, allowing for minimal margin pressures. Our top sector picks remains with BBNI, BBRI and BBCA.

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