Banking industry data released by the Financial Services Authority (OJK) recently show that in the first eight months of this year, loans rose by 8.3 percent year-on-year (yoy) to Rp 4.49 quadrillion (US$330.56 billion). This was attributable to a 7 percent annual increase in investment loans to Rp 1.13 quadrillion, accounting for 25 percent of the total loans and a 10.2 percent annual rise in consumer loans to Rp 1.27 quadrillion, representing 28 percent of the overall loans.

In contrast, working capital loans dropped by 7.8 percent on a yearly basis to Rp 2.08 quadrillion in the January-July period, making up 47 percent of all loans.

The data also reveal a slight decline in average blended loan yields to 11.60 percent from 11.64 percent over the period, driven by lower investment and consumer loan interest rates.

Meanwhile, overall deposits in the banking industry jumped by 9.6 percent yoy to Rp 5.05 quadrillion as demand deposits rose by 8.6 percent to Rp 1.15 quadrillion (23 percent of the total) and savings deposits surged by 8.5 percent to Rp 1.54 quadrillion (31 percent of the total). Time deposits climbed more highly than others at 10.8 percent to Rp 2.36 quadrillion (46 percent of the overall).

Moreover, average blended deposit rates stood at 3.57 percent (versus 3.55 percent in the first seven months of 2017 and 3.77 percent in the first eight months of 2016) as foreign-currency funding became more expensive.

We were quite pleased to see that as of July, the net profit in the sector still grew considerably by 17.7 percent yoy to Rp 87.8 trillion even though it was lower than 20.3 percent growth as of June.

The strong result was supported by the net interest income that expanded by 5.7 percent yoy to Rp 235.9 trillion, while the operating expense dipped by 1.6 percent yoy to Rp 285.1 trillion. The net interest margin (NIM), meanwhile, remained low at 5.35 percent (versus 5.35 percent as of July, 5.59 percent as of August 2016).

Furthermore, non-performing loans (NPL) in the sector also rose to 3.05 percent in the January-August period versus 3 percent in the January-July period. The NPL in the mining industry stood at 8.02 percent (versus 7.49 percent in the first seven months of 2017), while the NPL in the processing industry settled at 3.7 percent percent (versus 3.31 percent in the first seven months of 2017). The special mention loan (SML) ratio, however, improved to 5.2 percent (versus 5.3 percent in the January-July period, 5.5 percent in the January-August period of 2016).

The loan-to-deposit (LDR) ratio remained steady at 88.8 percent in the first eight months of this year from the first seven months, but the ratio of current account and savings account (CASA) was down to 53.4 percent (against 53.9 percent in the first seven months of 2017). On the other hand, capital remained robust, demonstrating a solid capital adequacy ratio (CAR) of 23.34 percent (versus 23.23 percent from January to July).

We reiterate our overweight view on Indonesian banks, but focus on the stock selection. The Indonesian services sector (JAKFIN) is up 26 percent year-to-date (ytd), outperforming the country’s benchmark Jakarta Composite Index (JCI) at 12 percent ytd.

We remain optimistic that the third quarter results to be released this month will reveal solid earnings in the banking sector, largely driven by improvements in asset quality and a decline in credit costs for the bottom line boost.

Our top banking picks remain unchanged, namely Bank Mandiri (BMRI), Bank Rakyat Indonesia (BBRI), Bank CIMB Niaga (BNGA) and Bank Panin (PNBN).
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The writer is Acting Head of Equity Research at PT Bahana Sekuritas

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