Indonesian Banks: APAC Focus: Assessing Asset Quality Risk

Research evidence excerpt

Indonesian Banks: APAC Focus: Assessing Asset Quality Risk

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.