Indonesia banks under our coverage are down by an average of 14% YTD, underperforming the local index by 2%. We believe the performance is due to concerns over asset quality, growth and the external vulnerabilities affecting Indonesia. We believe the results YTD and guidance from managements suggest that the non-performing loans, while rising, are not a serious threat to earnings. The increase in NPLs to 2.8% at the end of August, from 2.3% a year ago, does not suggest a systemic risk in the system.
We believe investors should buy the Indonesia banks as potential interest rate cuts, together with attractive valuations, could lead to a re-rating. We believe Bank Indonesia will be in a position to cut interest rates in 1Q by 50bp as inflation recedes. This should augur well for the banking sector, as a rate cut is viewed as stimulating growth, adds liquidity, and lowers non-performing loans. We believe the market is becoming comfortable with the sector’s asset quality as the slowdown in commodity prices, which started in 2011, has led to only a modest increase in NPLs rather than a systemic risk. The banks are trading at 1.8x forward book, 20% below their five-year mean.
Release Date: December 10 2015
NOMURA Global Market Research
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