Indonesia Banks: Bank-only results within our expectations
Bank-only net profit in 10M20 down by 33% YoY
Banks under our coverage have posted their bank-only 10M20 results; the combined net profit reached IDR63.1tn (-33.1% YoY), mainly on higher provision expense of IDR72.7tn in 10M20 (+58% YoY). Net interest income (NII) posted negative growth of 1.9% YoY, as NIM remained under pressure at an average 4.7% in 10M20, down by 46bps YoY, while loan growth remained soft at 1.0% YoY. It is worth noting that BBRI booked the highest drop in NII of 6.8% YoY in 10M20, as its NIM dropped the most among banks under our coverage, but in terms of net profit, BBNI booked the worst drop of 72.2%, as its provision expenses increased by ~211% compared to last year, which is in-line with the company’s cost of credit guidance to reach 3.0%-3.5% by the end of this year. Overall, BBCA is the best performer among the big-4 banks, as its NIM is only down by 26bps YoY, as BBCA has the lowest CoF and its TD rate only reached 3.3% at the moment.
Loan growth in the banking sector remains soft
Banks under our coverage booked total loan growth of 1.0% YoY as of October 2020, supported mainly by the big-4 banks (2.3% YoY loan growth) vs. -3.9% loan growth booked by the smaller banks. This was in line with the continuing soft loan growth in the banking system of -0.9% as of October 2020, still down from -0.4% in the previous month and last year’s loan growth of 6.6%. Investment loan growth booked the highest rate of 1.4%, but was still down from the previous month’s 3.38%, while the working capital loans booked negative growth of 2.72%. Total deposit growth was slightly down to 11.6% as of October 2020 vs. 12.1% in the previous month. It is worth noting that liquidity remains ample in the banking sector with an LDR of 86.2% as of October 2020. Average TD rate was down by 26bps MoM while the adjustment in loan yield only reached 5bps.
Maintain Overweight stance on the sector
We maintain our OVERWEIGHT stance on the sector on the back of still attractive valuations, and believe that continued support from the government, Financial Services Authority (OJK), and Central Bank (BI) to counter the economic impact of the Covid-19, will have a positive impact for the banking industry going forward. The government’s policy focuses on stimulus to boost loan growth, while OJK’s policy focuses on asset quality, and BI focuses on liquidity in the banking system. Despite negative earnings growth for the banks this year from additional credit costs for COVID-19 related risk and NIM pressure, we believe banks have improved their risk management and are more careful in providing loans. Hence, the impact on NPLs might not be that stark and we also believe once the pandemic is over, the recovery for the banking industry will be seen immediately. At this stage, BMRI and BBNI remain our top picks, as they have high exposure to the corporate segment, especially SOEs, which should be more resilient in times of economic downturn. We believe BMRI’s asset quality improvement trend will continue going forward, as management has been improving its credit-risk governance, and the new management also maintained the bank’s long-term plans. Downside risks to our call: 1) higher-than-expected provisioning, 2) further loan growth pressure, and 3) worse-than-expected margin pressure from a higher number of loans restructured.