Dark clouds, silver lining
We initiate coverage on Indonesian banks with a positive stance.
Indonesia is the last structural growth market for banks in Asia.
Short-term macro concerns weigh on sentiment but banks seem
well positioned to weather the storm. Key picks: Mandiri and BRI.
Recommendation and valuation summary
FY09F
Name Rating
Current
price, Rp
Target
price, Rp
Up /
downside P/E
EPS
Growth P/BVPS ROE Yield
BCA Hold 2875 2800 -2.6% 12.5 13.9% 2.7 23.1% 3.8%
Danamon Sell 6000 5000 -16.7% 12.2 6.1% 2.2 19.6% 4.1%
Mandiri Buy 2775 3375 21.6% 8.9 15.5% 1.6 18.8% 5.1%
BRI Buy 6000 7000 16.7% 10.4 16.1% 2.6 27.7% 4.4%
Priced at close of business 26 May 2008
Source: ABN AMRO forecasts
Asia's last structural growth market
Indonesia is Asia's last long-term structural banking growth market. Its loan to GDP
ratio (25%) is well below that of India (46%) and China (106%) in spite of similar
GDPs per capita. This, together with a GDP/loan growth multiplier that has averaged
4.1x over the past five years, suggests that 15-20% per annum loan growth should
be easily achievable for the foreseeable future.
Rising rates weigh on sentiment - numbers tell a different story
Indonesian banks have sold off 21.5% YTD on rising inflation, stoking fears of rising
rates. We believe these concerns are overdone and expect strong earnings
progression for Indonesian banks (average net profit growth of 19.1% in FY08F and
13.1% in FY09F). We highlight three reasons for optimism: 1) Lending growth is
unlikely to collapse. We forecast 17.1% in FY08 and 16.8% in FY09 vs 26.4% in
FY07A. The last rate rising cycle still delivered 14.1% loan growth in spite of a trough
to peak rate hike of 425bp versus 175bp expected this time; 2) net interest margin
expansion should compensate for lower loan growth as rising rates deliver 20-50bp of
NIM expansion over the next two years. 74.0% of the sector's assets are floating rate
vs only 43.3% of its liabilities. During the last rate hike cycle NIMs expanded by
70bp; 3) balance sheets are strong enough (average CAR of 19.2%, the second
highest in the region) to withstand a material deterioration in credit quality.
With macro fears rising, stock selection will be key
The sector now trades at 11x FY09F EPS for 12.9% EPS growth (versus 11.9x for
Asia). A 2.3x FY09F P/ BVPS would deliver 22.3% ROE (2.1x and 20.3% for Asia).
The best way to play the sector would be to buy gearing to rising rates through a
combination of a high proportion of floating rate loans and floating rate bonds
(Mandiri, Buy, TP Rp3,375), low LDRs funded by a large proportion of CASA (BRI,
Buy, TP Rp7,000 TP; BCA, Hold, TP Rp2,800) and exposure to corporate (including
state-owned enterprises) lending (Mandiri, BRI). Avoid high-LDR banks and large
exposure to consumers (Danamon, Sell, TP Rp5,000).
Produced by: ABN AMRO
Asia Securities
(Singapore) Pte Ltd
Overweight
Sector relative to market
www.abnamroresearch.com
Analysts
Trevor Kalcic, CFA
Singapore
+65 6518 7997
trevor.kalcic@sg.abnamro.com
Simon Ho, CFA
Hong Kong
+852 2700 5160
simon.ho@hk.abnamro.com
Permit No. MICA (P) 210/06/2007, Level 21, One Raffles Quay, South Tower, 048583,
Singapore
Important disclosures can be found in the Disclosures Appendix.

Contents
B A N K S 3 0 M A Y 2 0 0 8 2
E X E C U T I V E S U M M A R Y
Dark clouds, silver lining 3
Favourable risk-reward for Indonesian banks 3
S E C T O R P E R F O R M A N C E
Sold off on macro concerns 6
M A C R O D Y N A M I C S
Darkening clouds 8
I N V E S T M E N T V I E W
Asia’s last long-term structural growth market 11
Rising rates may be a silver lining 14
Sold down on fear of rising rates 14
Reasons why macro concerns seem overdone 15
Stock-picking throws up winners 24
Stock-screen analysis 24
I N D U S T R Y D Y N A M I C S
The Indonesian banking market 26
C O M P A N Y D Y N A M I C S
Company dynamics 29
The primary revenue drivers 29
Liabilities: main driver of balance sheet growth 29
Assets: from fixed-income instruments to loans 33
Tying assets and liabilities together 36
Non interest income as a revenue source 37
F O R E C A S T S & A S S U M P T I O N S
Comparison dashboards 38
C O M P A N Y P R O F I L E S
Company profiles 45
Bank Central Asia 46
Bank Danamon 61
Bank Mandiri 77
Bank Rakyat 92