First Read: Indonesian Banks "Exposure to Gunbuster" Tanja

Research evidence excerpt

First Read: Indonesian Banks "Exposure to Gunbuster" Tanja

Valuation Method and Risk Statement

Risks for the Indonesian banking sector include loan growth missing our expectations, while

NPLs/loans-at-risk could be higher than expected. Competition could drive down lending

yields or increase the cost of funds, which could result in lower-than-expected NIMs.

Regulatory changes could also alter profitability. Changes to macroeconomic variables and

government budgets could also change the earnings outlook for banks.

Bank Rakyat Indonesia: We derive our price target for BRI from a Gordon growth model,

while also considering the valuations of the subsidiaries. We believe risks include lower-than-

expected margins (due to a lending rate drop and higher cost of funds) and loan growth.

Rising competition in micro lending may affect profitability. Strong growth in lending in the

corporate non-SOE segment could result in higher-than-expected NPLs. Government

intervention may result in a suboptimal profitability ratio.

Bank Negara Indonesia: We base our price target for BNI on a Gordon growth model. We

think risks include tight liquidity and a still-high NPL ratio, which could result in slower-than-

expected loan growth, higher-than-expected NPLs and changes to banks' pricing policies,

whether regulatory or as a result of government intervention. Restructured loans could be

higher than expected, while the relapse ratio of restructured loans could also be worse than

expected. This would translate to NIM compression and higher credit cost.

Bank Mandiri: We derive our price target for Bank Mandiri from a Gordon growth model.

We believe the key risks for Mandiri – Indonesia's largest bank by assets – include a still-high

loans-at-risk ratio and a high loan-to-deposit ratio.