Capital raising still remote
Stress test on NPL show capital raising still remote
Our stress test simulation reveals that higher problem loans will affect
the banks if: 1) NPL level increases up to 5ppt from the base; 2) NPL
level needed for the bank’s CAR reaches the minimum 8%; and 3) CAR
reduces if banks were to implement the Basel II operational risk. We
conclude that banks can still sustain higher NPL level up to 2-3 times
from the base case before they are forced to conduct capital raising.
Given the government’s lack of funds, state banks may opt for tier-2
capital instead of tier-1/rights issues. Under the worst-case scenario of
rising NPL and Basel II implementation, BRI and BNI will see their CAR
depleting faster than the rest under the conservative assumptions.
Increased focus on liquidity NPL management
After reaching loan growth of 31% in 2008, amid concern over rising
NPLs and tight liquidity, banks are now focusing more on managing
liquidity and NPL. We therefore estimate that loan growth is going to be
11% y-y in 2009.
NPL meanwhile is expected to increase to around 6% by mid-2009
before sliding down again to 5% level by end 2009, up from 3.8% in
December 2008. Loans to manufacturing, which include the exporters,
will be more at risk given the historical high NPL level and contribution to
total loans.
Maintain NEUTRAL stance on the sector
We maintain our NEUTRAL stance on the Indonesian banking sector,
which has been more resilient compared to other banks around the
region in weathering the economic slowdown. The industry is trading at
1.4x P/BV 2009E. While valuation is still a moving target, we believe
banks are in good shapes with their high CAR, rising coverage ratio,
declining exposure to foreign exchange loans and high NIM. Top picks
are Bank Rakyat (BBRI; TP: IDR4,800) on its strong franchise in micro
credits, despite talks on potential asset quality deterioration and they are
at risk of lower CAR. Bank Mandiri’s (BMRI; TP: IDR2,300) high CAR
and better asset quality should improve sentiment while Bank Negara’s
(BBNI; TP: IDR1,250) steady operating improvement deserves better
rating. BCA (BBCA; TP: IDR2,750) remains the core holding while Bank
Danamon (BDMN; TP: IDR2,600) can wait until ex-date in April.

Stress test on higher NPL
Indonesian banks have been expanding their loan books fast in the past few years
(increasing at 31% in 2008), raising a concern that history will repeat itself with banks
having to recapitalize to improve their capital requirement. We have revised our
financial forecasts on the banks and under this uncertain economic situation, we have
made some stress test simulation to see the impact of higher problem loans on the
banks:
1) Impact on CAR in the case of NPL level rising up to 5.0ppt from the base case
2) NPL level needed for the bank’s CAR to reach the minimum 8%
3) CAR reduction if banks were to implement the Basel II operational risk in 2010
Impact on CAR due to higher NPL
The following exhibit shows the bank’s total CAR in 2009 in case NPL rises from our
base case, up to 5.0ppt (using the average special mention loans of 5% in September
2008). We expect average NPL to reach 5% by end 2009, down from 6% in mid-2009
on further write offs and expected economic improvement in 2H09. We assume the
coverage ratio remains unchanged under the rising NPL scenario and as a result, total
CAR will decline between 2% and 5.7%. BRI will suffer the most in this exercise as the
bank has one of the highest coverage ratios while its CAR is already among the low
end of the range. BNI’s expected lower coverage ratio than BRI helps the bank to
achieve a higher CAR despite its lower base CAR ratio.