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Banking stocks remain attractive despite recent slump: Analysts
Amid under-pressure margins and falling credit growth, analysts believe that the situation in Indonesiaâs banking sector might not be as bad as it looks
Change Size
May 30, 2014 - May 29, 2015.(Sources: IDX, OJK) (Sources: IDX, OJK)
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span class="inline inline-center">Amid under-pressure margins and falling credit growth, analysts believe that the situation in Indonesia's banking sector might not be as bad as it looks.
The latest banking statistics show that Indonesia's banking sector is experiencing tighter liquidity. In April, credit growth slumped to a five-year low level of 10.4 percent from 11.3 percent a month earlier, while deposit growth slowed to 14.2 percent from 16 percent in the same period.
Meanwhile, the banks' net profits fell 0.6 percent in April compared to a 4.2 percent surge a month earlier, while their ratio of non-performing loans (NPL) rose to 2.48 percent from 2.4 percent in the corresponding period.
Continuous deterioration in the banks' asset quality has dragged down their shares. This year, the shares of Bank Rakyat Indonesia (BBRI), Bank Negara Indonesia (BBNI) and Bank Mandiri (BMRI) have respectively fallen by 11.6 percent, 9.8 percent and 8.1 percent as the state-run lenders became major laggards for the Indonesia Stock Exchange
They underperformed the benchmark Jakarta Composite Index's (JCI) 5.23 percent drop so far this year.
Angga Aditya Assaf, an analyst with Trimegah Securities, argued that the share prices of Indonesian banks were apparently being 'over-punished' because of negative sentiments surrounding the industry.
This is because the present liquidity situation is still less volatile compared to 2009 as current deposit growth is still relatively stable, while the NPL risks are concentrated in some debtors only, he explained.
'Things may not be as bad as they seem,' said Angga, who had an 'overweight' position in banking stocks.
'Our deeper analysis suggests that banks with higher exposure to corporate and consumer loans are expected to have slower-rising NPL risks because of better loan performance,' he noted.
Despite a recent deterioration in the quality of local lenders' assets, the outlook of the banking sector in Indonesia was recently affirmed as being 'stable' by rating agency Moody's Investors Service, a relatively better position compared to the 'negative' outlook slapped on the banking industries in Hong Kong, India and Singapore.
Moody's predicted the strong profitability of Indonesian banks ' whose interest rate returns are among the highest in the world ' would mean that they are likely to withstand and survive the challenging operating environment.
'Indonesian banks have strong buffers in terms of high profitability and capital. Moreover, both corporate and household balance sheets remain healthy,' said Srikanth Vadlamani, Moody's vice president and senior credit officer.
Analysts also say that the outlook of the nation's banking sector would be supported by a short-term loosening by Bank Indonesia (BI), which has relaxed loan-to-value (LTV) requirements in a bid to support lending.
'While this [LTV ratio] will not stimulate demand, we believe it could lead to a lower cost for funds and potentially fewer non-performing loans,' Jaj Singh and Manjith Nair, analysts from Nomura Holdings, wrote in a note distributed to clients recently.
Amid the fall in banking stocks, Nomura Holdings had a 'buy' view on shares of BBRI, BMRI and private-owned Bank Danamon (BDMN), predicting that the combination of attractive valuations and the potential measures of easing liquidity could be supportive of their share prices.
