Indonesia Banks：Still more room to run

abcGlobal Research  Waiting for fundamentals to catch up  Improving earnings clarity to fuel the next leg of rerating  Preferred pick is BMRI followed by BBCA (both OW); downgrade BBRI to N from OW Macro data is holding up but there is noise. In our report Breaking from the herd, 6 February 2014, we highlighted three rerating catalysts: better macro data points, NIM expansion at large banks, and asset quality resilience. Although macro trends have been fairly encouraging, the trade balance has dipped to a deficit, and protectionist undercurrents are building given 2014 is an election year. Earnings clarity to provide the next leg of rerating. There is still little clarity on how bad it could get for credit costs and loan growth for the sector. However, we are confident that the asset quality at BBCA, BMRI and BBRI will be well managed. There is little evidence that NPLs will spin out of control. These three banks also have highly profitable franchises, and their pre-provision profits should be able to absorb any potential spike in credit costs without causing a dent on their book values. Lastly, all these banks are starting 2014 with very high loan loss coverage levels. The strength of their deposit franchises also suggests 2014e NIM will be higher than in 2013. We believe these characteristics will ensure commendable earnings growth of 9-17% at BMRI, BBCA and BBRI in 2014e, leading to a further rerating of these stocks. Our preferred pick is BMRI as we believe valuations are attractive at 2.1x 2014e PB. EPS forecasts tweaked. We tweak our EPS forecasts for BMRI, BBCA and BBRI by -3% to 2% for 2014-15. The biggest change is on BDMN, where we raise our 2014 net profit forecast by 10% after baking in less severe NIM compression. Despite this, our BDNM earnings estimates remain significantly lower than consensus. We believe the market is too optimistic on NIM and credit costs. Downgrade BBRI to N from OW. We downgrade the stock given its strong performance (+30% y-t-d). The stock now trades at 10x 2014e EPS and 2.4x Dec-14e BV. This is in line with its historical mean valuation multiple. FIG Indonesia Banks Indonesia Banks Still more room to run Indonesia banks sector valuation Bank Rating Price (IDR) Target price (IDR) ___ PB ___ __ ROE (%) __ ___ PE ____ 2014e 2015e 2014e 2015e 2014e 2015eBMRI OW 9,575 11,100 2.1x 1.8x 20.8 20.6 11x 9xBBCA OW 10,375 13,300 3.3x 2.8x 23.9 23.8 15x 13xBBRI N 9,450 10,300 2.4x 2.0x 27.6 26.6 10x 8xBDMN UW 4,400 2,300 1.3x 1.2x 11.7 12.4 11x 10xSector avg Source: Bloomberg, HSBC estimates. Priced as at close of 26 March 2014 Ratings: OW – Overweight, N – Neutral, UW – Underweight. We downgrade BBRI to N from OW. EPS estimate and target price changes (IDR) ______ 2014e _______ _______ 2015e _______ __ HSBC TP ___ Old New Chg Old NewChg Old NewBMRI 854 854 0% 1,017 1,011-1% 11,200 11,100BBCA 699 679 -3% 829 809-2% 13,800 13,300BBRI 970 937 -3% 1,077 1,1022% 10,000 10,300BDMN 362 397 10% 453 4550% 2,200 2,300Source: HSBC estimates 28 March 2014 Kar Weng Loo* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0621 karwengloo@hsbc.com.sg Todd Dunivant* Head of Banks Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 tdunivant@hsbc.com.hk View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch MICA (P) 118/04/2013 MICA (P) 068/04/2013 MICA (P) 077/01/2014 Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 FIG Indonesia Banks 28 March 2014 abc Indonesia banks – Financial ratios and assumptions BMRI BBRIBBCA BDMN BMRIBBRIBBCA BDM