Indonesia Banks (Overweight) Sector Update: Exploring Java - Daily Pack 2 May 2014

Good morning,

We recently travelled across Java to see how various banks are progressing. Buoyed by resilient local GDP growth, most banks expect loans growth across the island to remain robust this year. While Bank Tabungan Negara grapples with contracting NIMs, rising NPL and a shortfall in resources, Bank Mandiri’s aggressive micro loans growth may warrant caution. We are impressed by the progress of Bank Rakyat Indonesia’s micro business.

       Dropping in on Java. During our Java excursion, we visited Bandung, Semarang, DI Yogyakarta and Surabaya, and were given the opportunity to meet representatives from Bank Mandiri, Bank Rakyat Indonesia, Bank Tabungan, Bank BJB and Bank Negara Indonesia. Bank Mandiri and Bank Negara Indonesia provided comprehensive overviews on their regional businesses while our visits to Bank Rakyat Indonesia  and Bank Tabungan Negara focused on the banks’ micro and housing segments respectively.

       Optimism on local business to support loans growth. Despite the variance in provincial profiles, Java has proven to be resilient, booking GDP growth that is stronger than the nationwide numbers. For 2014, most bank representatives said their loans growth targets in Java are higher than their nationwide projections, as business loans growth is expected to remain resilient. However, consumer loans growth is expected to moderate. Bank Negara Indonesia expects credit growth across Java to exceed 20% y-o-y. Bank Mandiri and Bank Rakyat Indonesia aim to maintain strong micro loans growth, although we are more comfortable with the latter’s credit quality prospects. Meanwhile, Bank BJB’s consolidation of its micro business is underway although we expect growth to remain muted. As for Bank Tabungan Negara, loans growth looks set to slow down on inferior pricing, a shortage of housing supply and a shortfall in resources.

       Liquidity remains tight. The major banks have a formidable low-cost customer deposit base in Java whereas Bank BJB and Bank Tabungan Negara face challenges in growing customer deposits. We gather that the special time-deposit (TD) rates offered by banks that are not the top four players remain elevated, and the banks’ indication of customer deposit growth for 2014 suggest still-intense competition for funding.

       OVERWEIGHT. We still prefer big banks over small ones. Our top BUYs are Bank Rakyat Indonesia and Bank BJB among the big- and small-cap banking counters respectively. (Rocky Indrawan)

FROM TRADING DESK: JCI today is expected to be traded at 4,831.78 and 4,862.3.

ON THE PLATTER:

Ace Hardware (ACES IJ, BUY, TP IDR925) Results Review: So Far So Good

Adaro Energy (ADRO IJ, NEUTRAL, TP IDR1,250) Results Review: Most Cost-Efficient Coal Miner In Town

AKR Corporindo (AKRA IJ, BUY, TP IDR5,650) Results Review: Lower Than Expected

Bank Bukopin (BBKP IJ, NEUTRAL, TP IDR700) Results Review: Largely Unexciting

Bank BJB (BJBR IJ, BUY, TP IDR1,300) Results Review: Earnings Dive As NIM Contracts

Bukit Asam (PTBA IJ, BUY, TP IDR11,200) Results Review: Best Long-Term Growth Story

Cardig Aero Services (CASS IJ, BUY, TP IDR1,100) Results Review: Cruising Smoothly Ahead

Gudang Garam (GGRM IJ; NEUTRAL; TP IDR56,000): 1Q14 results review - In Line But No Catalyst For Further Rally

Harum Energy (HRUM IJ, NEUTRAL, TP IDR2,290) Results Review: Growth Remains At Risk Without High Dividends

Indofood CBP (ICBP IJ, BUY, TP: IDR10,050) Results Review: Noodles Boosted 1Q14 Earnings

Indofood Sukses Makmur (INDF IJ, NEUTRAL, TP: IDR7,200) Results Review: Good on Noodles and Flour

Mitra Adiperkasa (MAPI IJ, NEUTRAL, TP IDR6,350) Results Review: Still a Challenge

Mitrabahtera Segara Sejati (MBSS IJ, NEUTRAL, TP IDR1,000) Results Review: In Line But Facing a Challenging Year

London Sumatera (LSIP IJ, NEUTRAL, TP IDR2,372) Results Review: Better Than Expected 1Q

Logindo Samudramakmur (LEAD IJ, BUY, TP IDR4,900) Results Review: 1Q14 In Line

Semen Indonesia (SMGR IJ, BUY, TP IDR18,000) Results Review: A Good Start

Express Transindo Utama (TAXI IJ, BUY, TP IDR1,800) Results Review: On The Right Track

Wintermar Offshore Marine (WINS IJ, BUY, TP IDR1,200) Results Review: 1Q14 In Line – Bright Years Ahead

MEDIA HIGHLIGHTS:

Indocement’s 1Q14 earning was flat at IDR1,129bn (-1.5% y-o-y)

The government looks to changing Palm Oil Export Tax Structure

Government prepares power wheeling scheme

IPERINDO enforces the government to erase several tax constraints in new vessel production in Indonesia

The Government Seeks Economic Growth at 5.5 -6.3% in 2015

Best regards,

RHB OSK Indonesia Research Institute

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