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15 October 2019 Indonesia

EQUITIES Indonesia banks

Too early to see rate cut benefits
3Q19 reporting from Oct 22nd
Bank Tentative reporting date
Key points
Btpn Syariah
BNI
Oct-22 before market
Oct-23 2pm  Indonesia’s banks will report 3Q19 from Oct 22nd through 28th. Only BTN
Danamon Oct-23 after market will do a limited audit review this quarter.
BRI
Mandiri
Oct-24
Oct-28
 Net Interest Margins are not yet increasing; we continue to expect funding
cost tailwinds into 1Q20e as loan growth slows.
BCA Oct-28
BTN Mid-Nov. Limited review undertaken  We remain overweight in a regional and local context with Mandiri and
Source: Companies, Macquarie Research, October 2019 Danamon as our top picks of the top 4/mid-tiers respectively.

Price target changes: rolling to year-end 20e Conclusion

Stock M. cap Target Rp/sh Rec TSR
Bank Ticker US$m Old New %  Indonesia’s banks will report 3rd quarter updates from 22nd Oct through 28th.
BCA BBCA 52,884 27,450 27,640 N (8.4) Though the latest monthly data suggests Net Interest Margins aren’t yet
BRI BBRI 33,865 4,240 4,140 N 8.8 improving following rate cuts, slowing balance sheet growth and liability
Mandiri BMRI 21,409 9,100 8,900 O-P 39.5
BNI BBNI 9,110 9,500 9,820 O-P 44.4 management (lowering funding costs) should see this occur into 1Q20e.
Danamon BDMN 3,115 5,600 5,685 O-P 29.0
Btpn BTPS 1,937 3,700 4,000 N 4.0  We continue to see concerns on credit risk as over-discounted with the shares
Syariah
BTN BBTN 1,402 2,500 2,500 O-P 33.4 already factoring recent trough ROAs. Top picks in the sector with favourable
Bull and bear cases are shown inside. We include IFRS- risk-return are Mandiri of the majors and Danamon of the mid-tier lenders. BNI
9 balance sheet adjustments per guidance in 1Q20 and BTN are higher risk and potentially higher return propositions.
Source: FactSet, Macquarie Research, October 2019,
priced as of 14 Oct 2019 Impact
 Slower growth, margins stabilising. Credit demand remains soft with major
Valuations already discount trough ROAs
lenders BCA and Mandiri now projecting 10% or less loan growth for FY19.
P/Assets (x)
BCA Loan demand isn’t picking up post elections. Weaker GDP (c. 5.0%) until
0.6
commodities rebound and LDR constraints will keep this the case through 20e,
we think. The most recent 8M19 bank-only data suggests NIMs haven’t
R-Sq = 0.93
recovered yet but slower loan growth should allow lenders to be more
0.4
BRI
proactive on liability management, and we continue to expect modest NIM
Mandiri
improvements led by state banks (+12bps in 20e).
0.2
Danamon
BNI
 Earnings changes. In addition to earnings changes (-1.5% across our
BTN % ROA
- coverage in 19e/20e, ex BTN), we include IFRS-9 balance sheet adjustments
0.5 1.0 1.5 2.0 2.5 3.0 3.5
per latest guidance. Relative to consensus we are 5% below overall for 19e
15a-17a trough ROA 20e ROA
Npat with the only outlier Btpn Syariah (6% ahead on faster financing growth),
R-square across ASEAN bank coverage (28)
and most below on BTN (29%) as the bank plans to post higher provisions in
Source: Macquarie Research, October 2019
2H19. Despite the outsize credit concerns on Mandiri and BNI, we see
consensus as being fair. We are 4-5% below 19e eps for BRI and BCA.
Indonesian bank valuation matrix
ROE (%) P/B (x) P/E (x)  Key sector issues: Corporate credits and Muamalat. In the absence of
19e 20e 20e 19e 20e Krakatau Steel, provision charges would have continued declining. On
BBCA 17.2 17.0 4.0 27.5 24.8 Muamalat, the major state banks have only confirmed they are undertaking
BBRI 17.9 18.8 2.2 14.1 12.3
BMRI 15.1 16.2 1.5 11.0 9.5 due diligence at this stage. An outright takeover isn’t our base case
BBNI 13.8 15.0 1.0 8.2 6.9 considering Muamalat needs to be a stand-alone sharia entity to keep its
BDMN 8.4 9.9 1.0 12.5 10.2
BTPS 29.1 27.5 4.3 21.2 17.3 brand with its more conservative depositors, but other assistance is possible.
BBTN 4.7 13.7 0.8 17.9 6.1
Source: Macquarie Research, October 2019 Outlook
 We are overweight Indonesian banks in a regional and local context. Mandiri
and Danamon are our preferred banks of the majors and mid-tiers
Analysts respectively, both rated O-P, with reasonable risk-reward.
PT Macquarie Sekuritas Indonesia
Jayden Vantarakis +62 21 2598 8310  BNI and BTN (both rated O-P) are higher risk, higher return propositions on a
jayden.vantarakis@macquarie.com 12-month view. Both are trading at or below tangible book.

Please refer to page 15 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research Indonesia banks

Too early to see rate cut benefits

Fig 1 Rolling forward price targets to year-end 20e leads to modest changes as we incorporate
IFRS-9 adjustments and a marginally slower ROE environment. Still, decent upside is on offer
Stock Mkt cap Price target Rp/sh Rating 12 mth TSR
Bank Ticker US$m Old New %

BCA BBCA 52,884 27,450 27,640 N (8.4)

BRI BBRI 33,865 4,240 4,140 N 8.8
Mandiri BMRI 21,409 9,100 8,900 O-P 39.5
BNI BBNI 9,110 9,500 9,820 O-P 44.4
Danamon BDMN 3,115 5,600 5,685 O-P 29.0
BTN BBTN 1,402 2,500 2,500 O-P 33.4
Btpn Syariah BTPS 1,937 3,700 4,000 N 4.0
Source: FactSet, Macquarie Research, October 2019, priced as of 14 October 2019

Fig 2 We have an average 28% upside in a bull case Fig 3 On average our estimates are 5% below consensus in
scenario and 10% in a bear case scenario (limited downside) 19e, c. 3% ahead in 20e

% Bear Bull %
60 53 20.0 17.0
47
50 15.0
39
40 32 10.0
29 28
30 22 5.0 11.2 2.7
21
17
20 14
-
10 3
(5.0)
- (4.1) (5.2) (5.0)
(10.0) (6.4)
(10) (6)
(10) (15.0) (29.4)
(20)
(30) (21)
BNI Mandiri BRI BCA Danamon BTN Btpn
Syariah

Top 4 Mid-tier 19e 20e

Bear and bull case valuation methodolog

Source: FactSet, Macquarie Research, October 2019 Source: FactSet, Macquarie Research, October 2019

Fig 4 Valuations for major Indonesian lenders appear Fig 5 ...and already appear to discount worst case ROA
attractive against 20e projections... outcomes from prior cycle (FY15-17)

P/Assets (x) BCA P/Assets (x) BCA

0.7 0.7

0.6 0.6

0.5 0.5

0.4 R-Sq = 0.93 0.4 R-Sq = 0.93

0.3 BRI 0.3 BRI

Mandiri
Danamon
0.2 0.2 Danamon
Mandiri BNI
0.1 0.1
BNI
BTN % ROA BTN % ROA
- -
0.5 1.0 1.5 2.0 2.5 3.0 3.5 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Thailand Indonesia Malaysia Philippines Singapore Thailand Indonesia Malaysia Philippines Singapore

20e basis Trough ROA for Indonesian banks last cycle (minimum 15-17a) illustrated
Source: Company data, Macquarie Research, October 2019 Source: Company data, Macquarie Research, October 2019

15 October 2019 2
Macquarie Research Indonesia banks

 Our preferred stocks are Mandiri of the majors and Danamon of the mid-tiers as even in a bear-case
valuation scenario, we see most relative potential shareholder return. BNI and BTN, at or below
tangible book and rated O-P, present higher risk, higher return opportunities.

 On average, our estimates are 5% below consensus for Npat through year-end 19e and we project
6.3% 19e earnings growth for our coverage (8.0% ex-BTN). BNI and Mandiri are the only two banks
for which we are close to consensus for 19e, probably reflecting concerns on credit quality for these
banks already.

 Btpn Syariah (11% ahead): Credit growth is ahead of target at +27% YoY for 8M19, relative to
expectations of c. 20%. Recent commentary suggests this is driven by higher balances per
customer rather than new customer acquisition. Nonetheless, as a rare example of a bank
exceeding growth targets, this should drive positive upgrades.

 BTN (29% below): The bank has outlined plans to charge much higher provisions in 2H19 which
would in effect raise coverage sooner ahead of IFRS-9 and, all else equal, is positive for CET-1
and ROE in 20e. We wrote on this plan extensively here and here. In the absence of clear
guidance and targets yet for 20e, it appears consensus is extrapolating higher credit charges in 20e
however this won’t be necessary post IFRS-9 adjustments in Jan-20, hence why we are materially
higher. We also expect BTN will need to post better profitability in 20e ahead of a planned equity
raise in 21e.

 Danamon (6% below): We exclude the Adira Insurance P&L from our numbers, but as the sale
hasn’t closed yet (likely 4Q19), consensus may be continuing to include it. This issue isn’t relevant
for 20e, in our view.

 BCA (5% below): The bank’s 8M19 credit charge remains worse than guidance at 1.2%
annualised for 8M19 and recent commentary suggests loan growth of c. 10% (vs FY18a of 14.6%).
The bank has the most work to do relative to peers to maintain Net Interest Margins into onshore
rate cuts, though recent commentary from management suggests this is on track.

 BRI (4% below): The NIM is tracking at the lower end of guidance and the bank’s subsidiaries
provided zero net contribution in total for 1H19. Despite the positive commentary surrounding a
pivot back to micro banking, management have recently stated 8M19 consumer loan growth
remained at 6% with competition ongoing from state peers and regional lenders.

Fig 6 Our price targets consider a full restructured book coverage case (lower bound) and optimised capital case (upside)
Lower bound Upside - optimised at 17.5% CET-1 % Average
Bank Adj BPS Free capital Target ROE Fair P/B Fair value Adj BPS Free capital Target ROE Fair P/B Fair value Fair value
end-20e end-20e % x Rp/sh end-20e end-20e 3-yr x Rp/sh Rp/sh

BCA 7,768 - 17.5% 3.1 24,144 5,692 2,076 22.9% 4.5 27,680 25,912
BRI 1,395 364 21.0% 2.4 3,703 1,308 451 26.1% 3.2 4,579 4,141
Mandiri 3,808 720 19.0% 2.1 8,678 3,651 877 20.1% 2.3 9,108 8,893
BNI 6,919 - 14.2% 1.3 8,971 6,410 508 16.3% 1.6 10,674 9,823
BTN 1,362 - 15.9% 1.6 2,154 1,977 - 14.7% 1.4 2,774 2,464
Danamon 3,582 1,003 13.5% 1.3 5,534 3,555 1,030 14.1% 1.4 5,835 5,685
Btpn Syariah 896 - 26.4% 4.1 3,691 896 - 26.4% 4.8 4,343 4,017
For BTN a 14% book equity dilution factor is applied considering Rp4t anticipated equity injection in 21e. For BCA, the upside case is taken.
Source: Macquarie Research, October 2019

 We are making several earnings estimate changes as detailed overleaf to reflect slower loan growth
(11% vs 13% previously for the big 4) and some moderation of the NIM outlook considering 8M19
performance.

 We continue to see our credit charges as appropriate considering performance and the slower lending
environment for the past five years. We consider FY20e credit charges as not at material risk of
increases noting the current 8M19 performance doesn’t deviate much from the past decade average for
each of the major lenders.
 That the stocks continue to discount recent trough cycle ROAs already is the key reason we are
constructive on the sector (valuations).

15 October 2019 3
Macquarie Research Indonesia banks

Fig 7 Excluding changes to BTN, the Npat adjustment is modest at 1.5% in each of 19e/20e
Npat (Rp bn) ROE (%)
Old New Change (%) Old New Change
19e 20e 19e 20e 19e 20e 19e 20e 19e 20e 19e 20e

BCA 28,511 31,509 27,822 30,874 (2.4) (2.0) 17.6 17.3 17.2 17.0 (0.4) (0.3)
BRI 35,217 40,334 34,358 39,429 (2.4) (2.2) 18.3 18.8 17.9 18.8 (0.4) 0.0
Mandiri 30,421 35,132 28,946 33,545 (4.8) (4.5) 15.8 16.8 15.1 16.2 (0.7) (0.6)
BNI* 16,021 20,380 15,793 18,801 (1.4) (7.8) 13.9 15.8 13.8 15.0 (0.2) (0.8)

Avg top 4 27,543 31,839 26,730 30,662 (2.8) (4.1) 16.4 17.2 16.0 16.8 (0.4) (0.4)
BTN* 2,573 3,253 1,127 3,332 (56.2) 2.4 10.4 13.0 4.7 13.4 (5.7) 0.4
Danamon 3,837 4,707 3,759 4,602 (2.0) (2.2) 8.6 10.0 8.4 9.9 (0.2) (0.1)
Btpn Syariah 1,363 1,666 1,416 1,762 3.9 5.8 29.1 27.5 30.1 28.6 1.0 1.1

Avg coverage 16,849 19,569 16,174 18,906 (9.3) (1.5) 16.2 17.0 15.3 17.0 (0.9) (0.0)
Changes for BNI and BTN were made recently in reports published here and here respectively. Though reproduced here, these are not new changes.
Source: Macquarie Research, October 2019

Fig 8 Credit growth estimates reduced, except for Btpn Syariah for which 8M19 is tracking ahead
Loan growth (% y-y) LDR
% Old New Change Old New Change
19e 20e 19e 20e 19e 20e 19e 20e 19e 20e 19e 20e

BCA 13.0 12.3 10.3 11.8 (2.7) (0.5) 86.8 87.0 85.4 85.2 (1.5) (1.8)
BRI 11.8 13.1 11.0 12.1 (0.8) (1.1) 88.2 89.6 88.2 89.3 (0.0) (0.2)
Mandiri 11.3 12.6 10.1 11.3 (1.2) (1.2) 91.1 91.6 93.6 93.8 2.5 2.2
BNI* 16.6 14.7 14.4 14.7 (2.2) 0.0 89.7 91.4 89.0 91.8 (0.7) 0.4
Avg top 4 13.2 13.2 11.4 12.5 (1.7) (0.7) 89.0 89.9 89.1 90.0 0.1 0.1
BTN* 10.0 11.4 10.0 11.4 - - 109.1 108.2 109.1 108.2 - -
Danamon 10.4 13.1 10.4 13.1 - - 127.9 125.3 127.9 125.3 - -
Btpn Syariah 19.9 16.5 24.4 16.8 4.5 0.3 95.0 96.0 95.0 96.0 - -

Avg coverage 13.3 13.4 13.0 13.0 (0.3) (0.4) 98.3 98.4 98.3 98.5 0.0 0.1
Changes for BNI and BTN were made recently in reports published here and here respectively. Though reproduced here, these are not new changes.
Source: Macquarie Research, October 2019

Fig 9 Lower NIMs as funding costs taking longer to decline. Overall modest NIM improvements in 20e expected
Net Interest Margin Credit charge
bps Old New Change Old New Change
19e 20e 19e 20e 19e 20e 19e 20e 19e 20e 19e 20e

BCA 646 622 653 616 6 (6) 62 59 85 61 22 2

BRI 723 734 715 725 (7) (9) 221 240 221 230 0 (10)
Mandiri 568 562 557 553 (11) (9) 161 152 162 151 1 (1)
BNI* 495 528 491 522 (4) (6) 160 155 160 170 - 15

Avg top 4 608 611 604 604 (4) (7) 151 151 157 153 6 2
BTN* 400 368 364 375 (35) 7 90 70 160 60 70 (10)
Danamon 802 805 797 797 (6) (7) 243 236 243 236 - -
Btpn Syariah 2,920 2,881 2,962 2,911 42 30 400 400 392 400 (8) -

Avg coverage 606 603 596 598 (10) (5) 191 187 203 187 12 (1)
Changes for BNI and BTN were made recently in reports published here and here respectively. Though reproduced here, these are not new changes.
Average NIM for total coverage excludes Btpn Syariah (due to magnitude differences)
Source: Macquarie Research, October 2019

15 October 2019 4
Macquarie Research Indonesia banks

IFRS-9 adjustments: average 112bps impact to CAR factored into our estimates
 Indonesia’s major banks have been undertaking parallel runs for IFRS-9 (life of loan cycle) provision
charges since July and have been making assessments on the one-time balance sheet adjustments
(higher provisions, lower retained earnings) with external advisors. The below illustrates the guidance
across our coverage, where provided.

 In aggregate, the change should lift impaired loan coverage (NPLs + restructured loans, our preferred
measure) from 47% to 63% (bank only) if applied on the latest balance sheet numbers. Due to the
equity reduction, ROE would increase by c. 0.8% as a consequence of these changes.

Fig 10 IFRS-9 adjustments are reflected in our estimates, on average impacting CAR by 112bps
Adjustment Impaired loan coverage (%) Bank-only ROE (%)
Bal sheet (Rpt) CAR (bps) Pre (2Q19) Post (pro-forma) Pre (8M19) Post (pro-forma)

BTN 3 225 11.2 21.9 9.65 11.02

Mandiri 13 150 47.9 69.4 13.66 14.69
BRI 8 90 61.1 74.3 17.50 18.26
BNI 5 60 40.2 54.5 11.77 12.33
Danamon 1 60 43.0 59.4 8.34 8.54

Weighted average 8.1 112 47.3 63.1 13.97 14.80

Per latest management guidance. BTN plans to a large portion of the IFRS-9 adjustment into 2H19 provision expenses
(the total c. Rp6t considering Rp3t in estimated expenses). BCA expects a small impact but hasn’t disclosed. Btpn
Syariah has 75% of credit <12 months and hence the impact is minimal.
Source: Company data, Macquarie Research, October 2019

 The guidance so far indicates that credit charges won’t differ materially in an IFRS-9 implementation
from Jan 2020, and this intuitively makes sense as the current run-rate credit charge (8M19) doesn’t
deviate much from the past decade average credit charge.

 For this reason, we continue to think recent concerns on credit quality are more than adequately
factored into equity valuations, with the outcome in all likelihood less bad than is feared.

Fig 11 Current credit charges don’t deviate materially from the past decade average. This
indicates forward adjustments under IFRS-9 life of loan provisions should be minimal for most
banks
Bank Credit charge (%) Credit (Rpb)
8M19a Past decade average Difference Aug-19

BRI 2.04 2.09 -0.05 848,026

Mandiri 1.48 1.43 0.05 713,122
BCA 1.21 1.10 0.11 563,120
BNI 1.61 1.57 0.04 525,678

Top 4 banks 1.63 1.60 0.03 2,649,946

BTN 0.42 0.47 -0.05 253,693

Panin 0.55 0.98 -0.43 133,695
OCBC NISP 0.59 0.74 -0.15 118,908
Maybank 1.28 1.63 -0.35 116,327
Permata 1.84 2.41 -0.57 104,490
Danamon 3.58 3.92 -0.34 102,867

Total 1.52 1.56 -0.04 3,479,925

Bank only data
Source: OJK, Macquarie Research, October 2019

In addition to IFRS-9, corporate credits and potential bail outs will be in focus, we think
 Most of the provisions for Krakatau Steel have already been expensed, however for reasons we
elaborate on overleaf, we don’t actually expect the state banks to lose money on the restructured
agreement.
 Private corporate loans, such as those to the textiles industry (Duniatex) pose more risk, however the
exposure here is very small at 0.3%/0.1% for Mandiri/BNI.

 The banks are not directly involved in any plans for the state insurance company Jiwasraya (not listed)
however there remain questions on any potential assistance to the sharia lender, Muamalat.

15 October 2019 5
Macquarie Research Indonesia banks

Krakatau steel: up to 55bps credit charge hit, restructuring terms are agreed
 The major state banks continue to receive questions on their exposure to Indonesia’s national steel
company, Krakatau Steel (KRAS IJ – N-R), and we expect a disproportionate amount of focus (in our
vew) again this quarter. The total facility is c. US$2.1b, according to the banks, with the highest
exposure by Bank Mandiri followed by BNI. The restructuring need was flagged as early as FY16 by
Mandiri’s CEO.

 We continue to believe the lenders won’t actually lose money on the exposure noting the strategic
nature of Krakatau Steel for the Republic of Indonesia, moreover this is a short-term expense issue and
will entail opportunity cost (lower loan yield) until likely at least FY24.

 The level of provisioning targeted by year end FY19 continues to match the respective exposure to
Tranche C less any collateral, and entails between 18bps-55bps credit charge impost in 19e (most of
which has been expensed already).

 Tranche A remains the serviceable working capital exposure (10% of total, repaid with cashflows from
operations), Tranche B (35%) serviced from asset sales and Tranche C the so-called ‘unserviceable’
proportion. In reality Tranche C (45% of the overall facility) should be repaid by equity, with the
business needing to undertake a rights issue sometime in the next few years (tranche C is repayable in
2 bullets in FY24 and FY27). The Republic of Indonesia remains the largest shareholder (80%).

 The drag in the interim will continue to be the loan yield, at c. 6%, and therefore below the marginal
cost of a time deposit; this remains the key issue in our view as opposed to any likely credit losses and
the key reason why some foreign lenders took longer in assessing the restructuring proposal.

Fig 12 The Krakatau restructure covers c. US$2.1b combined bank loans with 55% in Tranche C
that will ultimately have a planned takeout via equity between FY24-27
% All banks Mandiri BNI BRI Other banks

Share of total syndicate 100 27 21 8 43

Tranche A 10 11 10 10 10
Tranche B 35 39 42 44 27
Tranche C 55 50 48 46 62

Target provisioning FY19 50 30 60

Proportion total loans (8M19) 1.1 1.2 0.3
Impact on 19e credit charge 0.55 0.36 0.18
Mandiri and BRI are already at the target level, as of 8M19 BNI is in the low 20s %
Source: Company reports, Macquarie Research, October 2019

Duniatex: Limited progress, but a smaller exposure

 Duniatex was a high profile corporate bond default last quarter. The latest media reports suggest 82%
of the group’s US$1.5b debt is past due. Contacts in the textiles industry have confirmed that falls in
finished goods prices of c. 30% over the past 12 months have caused issues for companies that
weren’t matching inventory purchases with sales, noting relatively thin margins in the sector. Creditors,
including Bank Mandiri and BNI, are seeking asset sales to protect their exposure, however as
restructuring efforts are ongoing, limited progress has been achieved.

 The exposure here is relatively small for these two lenders. Bank Mandiri has Rp2.2t total exposure
(0.4% of loans), after previously identifying the account as a watch listed exposure and seeking to
reduce (from a peak of Rp5.5t). BNI has c. Rp780b exposure, Rp460b of which is at the core Bank BNI
level and the balance in the Syariah subsidiary (i.e. in total 0.1% of gross loans).

Muamalat: more questions than answers at this stage

 We expect a heightened focus through earnings season on Bank Muamalat. Though it’s easy to
dismiss the issue as there have been false flags here before, the continued deterioration in Muamalat’s
performance, apparent lack of fresh equity (despite plans for this during 2H18) and the inauguration of
Indonesia’s new Vice President Ma’ruf Amin scheduled for Oct 20th (noting his position on the board of
supervisors at the bank) make this a potential risk that needs to be taken seriously in our view.

15 October 2019 6
Macquarie Research Indonesia banks

 So far, the major state banks have only confirmed they are undertaking due diligence. An outright
takeover isn’t our base case considering Muamalat needs to be a standalone sharia entity to keep its
brand with its more conservative depositors, but that doesn’t preclude other assistance. We estimate a
worse case Rp11t capital need under a scenario where all restructured credits are non-performing.

Our view, as we highlighted here, is BRI is most at risk owing to:

 i) its core bank profitability (higher ROA) providing greater scope to absorb losses,

 ii) its relatively underweight position in Sharia banking relative to peers (and as a share of its
business), making the assumption that sharia banking is a desirable segment to be in, and

 iii) the stock’s valuation being at a considerable premium to Mandiri and BNI, or 30-70% on a 19e
PE basis.

Fig 13 Muamalat’s potential equity shortfall has widened Fig 14 42% of the bank’s assets are impaired

Rpt 5.5 %
6.0 4.0 3.6 3.9 3.9 45 110.0
3.3 3.5
4.0 40 42.4 90.0
0.8
2.0 0.9 35
2.6 -1.0 -0.9
0.0 -1.7 30 37.0 70.0
-2.0 -2.9
-0.6 25
-4.0 26.2 50.0
20 23.3 24.3
-3.3
-6.0 -4.3
-5.4 15 30.0
-8.0
-7.5 10 13.7
-10.0 -8.7 10.0
13 14 15 16 17 18 1H19 5
6.0
100% restructured loans are bad debts 0 -10.0
13 14 15 16 17 18 1H19
50% restructured loans are bad debts
NPF ratio (gross) (%) NPF ratio (+ restructured) (%)
0% restructured loans are bad debts
Coverage (NPF) (%) Coverage (all impaired) (%)
Reported equity
Considers Equity + Loan loss provisions – stressed assets under different Coverage against impaired assets 4.7%
scenarios Coverage against reported Non Performing Finance 36.5%
Source: Company data, Macquarie Research, October 2019 Source: Company data, Macquarie Research, October 2019

Fig 15 We estimate a potential upper limit of Rp11t equity shortfall under a full write-off scenario
of impaired assets and returning the bank to its minimum required 6% CET-1 ratio

RWAs [a] 32,414

Tier 1 capital (reported) [b] 3,554
Non performing finance [c] -1,692
Loss provisions [d] 617
Reported Tier 1 + Provisions – NPF [e = b + c + d] 2,479
Restructured loans [f] -11,557
Tier 1 + provisions less impaired assets [g = e + f] -9,078
Min regulatory Tier 1 capital (6% RWAs) [h = 6% x a] 1,945

Potential gap [h – g] 11,023

Imputed from 1H19 reported financial data
Source: Company data, Macquarie Research, October 2019

15 October 2019 7
Macquarie Research Indonesia banks

Fig 16 Sharia banking positions of the major state banks

BRI Mandiri BNI

Total finance (Rpb) 21,855 67,144 28,386

Total assets (Rpb) 37,915 98,341 41,049
Sharia % of total credit 2.7 8.2 5.5
Sharia market share 7.9 20.6 8.7

Sharia unit ROA (%) 0.63 0.42 1.04

Core bank ROA (%) 2.92 2.28 2.08

Sharia Credit quality

NPF (%) 6.73 3.28 2.93
Impaired (%) 9.65 6.38 11.98
NPF coverage (%) 37.9 104.5 98.5
As at end FY18. ROAs are 5 year trailing averages
Source: Company data, OJK, Macquarie Research, October 2019

Otherwise, overall credit metrics appear manageable

 The underperformance year to date of certain lenders’ share prices (Mandiri -11%, BNI -19% in IDR
terms) relative to the overall Jakarta Financials (+5% ytd) is largely due to concerns on credit quality
depressing ROE for these lenders. Nonetheless, the most recent monthly data indicates that 9M19
credit charges should be -4bps overall and -14bps for the state banks noting 1H18 was elevated.

Fig 17 Overall loans at risk coverage in line with the prior 5 Fig 18 Credit charges rising but still 40% below levels seen
year average (35%) in the recent cycle peak (4Q16)

90 % %

80 4.00
70 3.50

60 3.00

50 2.50

40 2.00

30 1.50

20 1.00
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19

.50

3Q19*
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
Impaired - state Loans at risk - state
Impaired - private Loans at risk - private
Total State Private
Impaired - total Loans at risk - total
Impaired considers NPL and restructured Quarterly annualised. 3Q19 takes Jul-Aug and imputes run-rate
Loans at risk also includes all special mention
Source: OJK, Company data, Macquarie Research, October 2019 Source: OJK, Company data, Macquarie Research, October 2019

 Total impaired loans (NPLs + restructured) were stable for state banks last quarter and continued to
decline for private lenders (considering the top 10 as a cohort). The monthly data doesn’t give
balances; we can only infer credit charge expenses. Overall provision coverage was 50% against
impaired loans and as we have highlighted previously, this should rise by c. 16ppt on average for the
major state banks into Jan-20 IFRS-9 changes, all else equal.

15 October 2019 8
Macquarie Research Indonesia banks

Fig 19 State banks loans at risk 10.8% per 2Q19 Fig 20 Private bank loans at risk 7.2% per 2Q19

% %
14.00 12.00

12.00 10.00

10.00
8.00
8.00
6.00
6.00
4.00
4.00

2.00 2.00

.00 .00

4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
NPL Restruct Special Mention NPL Restruct Special Mention

Bank only. Sum of BRI, Mandiri, BNI and BTN Bank only. Major top 10 banks, ex state banks
Source: OJK, Company data, Macquarie Research, October 2019 Source: OJK, Company data, Macquarie Research, October 2019

Fig 21 Provision coverage 50% against impaired loans... Fig 22 ...on average down vs 12 months ago -4ppt

% %
23
25
200
20
15
150 140
10
115 3 3
104 5
100 -
64 61 -5 -1 -1 -2
55 -3 -4 -3 -3
48 43 50 -10 -5-4
50 40 38 35
29 -15 -11
11 -20 -16
- -25

NPL Impaired Loans at risk NPL Impaired Loans at risk

Bank only numbers as at 2Q19 Bank only numbers as at 2Q19 relative to 2Q18
Source: OJK, Macquarie Research, October 2019 Source: OJK, Macquarie Research, October 2019

NIMs yet to improve, but slower growth should help funding costs
 Credit demand remains soft with major lenders BCA and Mandiri now projecting 10% or less loan
growth for FY19. Loan demand isn’t picking up post elections. Weaker GDP (c. 5.0%) until commodities
rebound and LDR constraints will keep this the case through 20e, we think.

 The most recent 8M19 bank-only data suggests NIMs haven’t recovered yet but slower loan growth
should allow lenders to be more proactive on liability management, and we continue to expect modest
NIM improvements led by state banks (+12bps in 20e).

15 October 2019 9
Macquarie Research Indonesia banks

Fig 23 Net Interest Margins have continued to decline as

banks have paid higher rates to maintain LDRs Fig 24 Loan to Deposit Ratio (LDR) with Aug-19 at 95%

% %
105
8.0
100
7.0
95
6.0
90

5.0 85

4.0 80

3.0 75

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19
Apr-19
Jan-14
Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Jan-15
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-14

Jan-16

Jan-17

Jan-18

Jan-19
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
NIM - top 4 NIM - mid tiers Top 4 Mid tiers Total

Bank only. NIM for top 4 YoY in 3Q19td -30bps. Mid-tier -38bps Bank only
Source: OJK, Company data, Macquarie Research, October 2019 Source: OJK, Company data, Macquarie Research, October 2019

 Following a trough in 1Q18, earning asset yields have improved for both the top 4 and mid-tier banks
on some asset repricing through 4Q18-1H19. Loan growth had been outpacing deposit growth since
mid-2018, however as of August 2019, that started to inflect for mid-tier lenders. This should allow for
funding cost management on time deposits through year end allowing for the modest pickup in NIMs
we are expecting in 1Q20e.

Fig 25 Earning asset yields stabilising Fig 26 Funding costs elevated and yet to come down

% %
11.5 6.5
6.0
11.0
5.5
10.5
5.0
10.0 4.5

9.5 4.0
3.5
9.0
3.0
8.5 2.5
8.0 2.0
Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19
Jan-19
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Earning asset yield - top 4 Earning asset yield - mid tiers Funding cost - top 4 Funding cost - mid tiers

Source: OJK, Company data, Macquarie Research, October 2019 Source: OJK, Company data, Macquarie Research, October 2019

15 October 2019 10
Macquarie Research Indonesia banks

Fig 27 Loan growth has already started to slow. We expect Fig 28 Mid-tier lenders already seeing deposit growth faster
10% across the major banks (top 11) by year end than loans, top 4 growth easing

% %
20 10
18 8
16 6
14
4
12
2
10
-
8
-2
6
4 -4
2 -6
- -8
Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19
Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
Top 4 banks Mid-tiers Major banks Top 4 banks Mid-tiers Major banks

Source: OJK, Macquarie Research, October 2019 Source: OJK, Macquarie Research, October 2019

Fig 29 Interest Bearing Liability (Funding) split: wholesale Fig 30 Loans comprise 79% of earning assets (the same as
and time deposit costs should be declining into rate cuts 5 years ago, despite a rising LDR); 21% is liquidity

% %
100 6 6 100
14 14 7 11 8 12 11 10
90 17 16 90 18 19 20 20 21 21 22 22 21
24 26 27
80 80
70 49 37 39 30 36 70
49 31
60
60 55 54 48 60
50 50
90
40 40 82 81 80 80 79 79 78 78 79
74 74 73
30 58 30
52 52 53 54
20 43 45 20
31 32 34 35
10 10
- -

CASA deposits Time deposits Wholesale Loans Other Earning Assets

Bank only – as at August 2019 Bank only – as at August 2019

Source: OJK, Macquarie Research, October 2019 Source: OJK, Macquarie Research, October 2019

We expect ongoing easing on LDR targets (and variants thereof), gradually. Actual liquid assets
are ample at c. US$30b considering Basel III requirements with US$26b held in the big four
 There have been several progressions from the basic ‘LDR’ (Gross Loans/Total Deposits) in Indonesia
over the past couple of years, the latest of which is the Macro-Prudential Intermediation Ratio (RIM).
The latest RIM ratio will come into effect from Dec 2019. It adds back bonds issued and long duration
borrowings to the denominator and bonds held to numerator, excluding claims on or by fellow banks.

 Policy makers have focussed on keeping these ratios at 82-92% (84-94% from Dec), the theory being
that 6% of depositor balances should be reserved for primary reserves. Despite a higher reported Loan
to Deposit Ratio, Loan to Funding Ratio or ‘RIM’, the reality is there is plenty of liquidity (in aggregate)
on the major banks balance sheets; the perceived tightens being only a product of the singular focus
on the LDR or its variants.
 The reason for this growing disparity is equity. The theoretical framework only applies if the banks are
optimised for equity capital, with Indonesian banks increasingly under geared (declining assets/equity)
and Capital Adequacy Ratios that are very high (c. 23% system) by global standards and the banks’
own operating history. Including Equity in the funding mix shows it now accounts for 17% vs 14% five
years ago.

15 October 2019 11
Macquarie Research Indonesia banks

Fig 32 Equity is an increasing part of the “funding” mix

Fig 31 Leverage (Assets/Equity) falling – now at 6x (interest bearing liabilities and equity)

x %
8.0 50 47
45
7.3 45
7.5
40
35 33
7.0
30
30
6.5 25
20 17
6.0 6.2 14
15
10 6 9
5.5
5.4 5
5.0 -

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19
Major banks BCA
CASA deposits Time Deposits Wholesale Equity

Major banks sum total of the top 11 banks. Bank only data Major banks sum total of the top 11 banks. Bank only data
Source: OJK, Macquarie Research, October 2019 Source: OJK, Macquarie Research, October 2019

 Under Basel III reporting requirements, regulators globally (including regulators in Indonesia) have
adopted Liquidity Coverage Ratio (LCR) reports and Net Stable Funding Ratio (NSFR) reports, with
banks in Indonesia mandated to keep the ratios of each above 100%. In practice the reported ratios as
of 2Q19 ranged quite considerably between 106% to 275% for LCR and 106% to 158% for NSFR.

 In managing the liquidity of the major banks, the question ought to be asked: if it’s OK for banks such
as BTN, CIMB Niaga and Maybank Indonesia to operate with LCR and NSFR ratios at 106-107%
(which is compliant and safe according to these regulations), but also entails an LDR as high as 114%
for BTN, why must the other major banks operate at maximum 94% LDR/RIM ratios and with NSFR
and LCR ratios materially higher?

 Under a totally optimised scenario (i.e. all banks could operate at 106-107% LCR and NSFR), this
suggests the reported normal LDR could move from 94% to 105% (if applied to 2Q19). This would
allow the top 10 lenders to treat c. Rp420pt (US$30b) in deposits as superfluous and more
aggressively manage down funding costs. In addition to allowing for better bank Net Interest Margins, it
would in theory eventually allow for loan rates to be more responsive as well (transmission) than is the
case currently.

Fig 33 Liquidity coverage ratio – 81% above the regulated Fig 34 Net Stable Funding Ratio – 23% ahead of regulated
minimum (only BTN is close to the threshold) minimum (led by strong deposit franchise majors)

% %
300 275 180
158
248 160
250 134 139
206 216 140 128 128 130
189 116 119 123
200 179 182 181 120 106 107 107 107
166
148 100
150 134
122
106 80
100 60
40
50
20
- -

As per 2Q19 disclosures As per 2Q19 disclosures

Source: Company data, OJK, Macquarie Research, October 2019 Source: Company data, OJK, Macquarie Research, October 2019

15 October 2019 12
Macquarie Research Indonesia banks

Fig 35 Under an optimised scenario for Liquidity Coverage and Net Stable Funding, LDR could be as high as 105%
Bank Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR) 2Q19 position Optimised LDR
Surplus Surplus Total Total Surplus
Rpb HQLA LCR (%) liquidity ASF NSFR (%) liquidity deposits loans deposits Optimised Current

BCA 198,477 275 122,384 754,416 158 248,427 668,719 551,678 122,384 101 82
BRI 236,358 206 115,446 964,960 128 169,832 898,480 844,951 115,446 107 94
Mandiri 217,116 179 89,151 845,899 117 78,673 738,790 725,293 78,673 109 98
BNI 122,205 190 54,349 567,814 134 120,521 559,444 516,388 54,349 102 92
OCBC NISP 40,920 221 21,368 120,635 130 22,083 130,416 118,834 21,368 108 91
Permata 36,296 216 18,568 101,715 119 11,387.97 112,950 106,727 11,388 105 94
Danamon 33,583 148 9,624 115,043 128 19,988 110,038 107,495 9,624 106 98
Panin 24,392 122 3,250 171,864 139 41,131.32 132,830 136,105 3,250 105 102
CIMB Niaga 48,576 134 10,326 185,295 107 1,546 196,681 188,247 1,546 96 96
Maybank 37,418 166 13,692 110,959 107 1,428.53 120,167 116,327 1,429 98 97
BTN 35,297 106 - 180,217 106 - 219,758 251,041 - 114 114
Total 3,888,274 3,663,087 419,457 105 94
As at 2Q19; Surplus liquidity assumes 106% both for LCR and NSFR (lowest common denominator amongst all major banks).
HQLA refers to ‘High Quality Liquid Assets’ per the LCR definition. ASF refers to the ‘Available Stable Funding’ component of the NSFR
Source: Company data, OJK, Macquarie Research, October 2019

 Such optimisations illustrated above are not in our forecasts (in practice we continue to observe the
LDR/LFR constraint), however given the ongoing constraints in the banking system (loans growth
outstripping deposits) we continue to watch for material changes. In practice how could policy makers
change this and lead to more credit creation? Below are some ideas.

 Including equity above the maximum worse case CAR calculation in the adjusted RIM (higher ratio
denominator). This is possible but not yet under consideration as far as we understand.

 Having the state take out much higher dividends at its major lenders (BRI, Mandiri, and BNI) and
placing the excess funds on deposit at the banks as opposed to keeping the funds tied up in equity.
In practice, this probably requires the Banking sector holding company to be established.

 Removing LDR/LFR/RIM constraints entirely and focussing on LCR and NSFR as liquidity
measurements for banking supervision (least likely in our view).

15 October 2019 13
Macquarie Research Indonesia banks

Fig 36 Indonesian banks valuation matrix

Btpn
BCA BRI Mandiri BNI Danamon Syariah BTN

Ticker BBCA IJ BBRI IJ BMRI IJ BBNI IJ BDMN IJ BTPS IJ BBTN IJ

Market Cap US$m 52,884 33,865 21,409 9,110 3,115 1,937 1,402
ADV US$m 26.9 30.4 19.0 10.5 4.0 12.4 3.0
Price IDR/sh 30,625 3,920 6,550 6,975 4,550 3,590 1,890
Target IDR/sh 27,640 4,140 8,900 9,820 5,685 4,000 2,500
Recommendation N N O-P O-P O-P N O-P
20e Div yield % 1.4 3.2 3.7 3.6 4.0 1.0 1.1
12-mth TSR % (8.4) 8.8 39.5 44.4 29.0 4.0 33.4

Loan growth %
17a 12.3 11.4 10.0 12.2 2.4 21.1 21.0
18a 14.6 14.0 12.3 16.2 8.0 20.2 19.5
19e 10.3 11.0 10.1 14.4 10.4 24.4 10.0
20e 11.8 12.1 11.3 14.7 13.1 16.8 11.4

LDR %
17a 81 87 88 84 122 92 103
18a 86 88 95 87 125 96 103
19e 85 88 94 89 128 95 109
20e 85 89 94 92 125 96 108

NIM %
17a 6.67 8.06 5.53 5.52 8.90 33.96 4.42
18a 6.55 7.60 5.36 5.28 8.70 30.88 4.00
19e 6.53 7.15 5.57 4.91 7.97 29.62 3.64
20e 6.16 7.25 5.53 5.22 7.97 29.11 3.75

Credit cost %
17a 0.58 2.47 2.25 1.71 2.86 3.97 0.49
18a 0.52 2.32 1.86 1.55 2.53 4.14 0.78
19e 0.85 2.21 1.62 1.60 2.43 3.92 1.60
20e 0.61 2.30 1.51 1.70 2.36 4.00 0.60

Cost to Income %
17a 44 42 47 46 53 56 56
18a 44 42 45 45 53 49 56
19e 43 42 46 45 51 43 58
20e 43 41 45 43 48 41 59

ROE %
17a 19.1 18.5 12.5 14.7 9.9 34.8 14.8
18a 18.3 18.5 14.4 14.5 8.5 30.9 12.3
19e 17.2 17.9 15.1 13.8 8.4 30.1 4.7
20e 17.0 18.8 16.2 15.0 9.9 28.6 13.7

P/E x
17a 32.4 20.7 15.4 9.5 11.8 41.3 6.6
18a 29.2 14.9 12.2 8.7 12.9 28.7 7.1
19e 27.1 14.1 10.9 8.3 12.5 19.5 17.8
20e 24.5 12.3 9.4 7.0 10.2 15.7 6.0

P/B x
17a 5.8 2.9 1.8 1.3 1.1 Nm 0.9
18a 5.0 2.6 1.7 1.2 1.1 6.9 0.8
19e 4.4 2.4 1.6 1.1 1.0 5.1 0.8
20e 3.9 2.2 1.4 1.0 1.0 4.0 0.8
Priced as at close 14 Oct 2019
Source: Company data, Macquarie Research, October 2019

15 October 2019 14
Macquarie Research
Important disclosures:
Recommendation definitions
Macquarie – Asia, USA, Europe and Mazi Macquarie
(SA):
Outperform – expected return >10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie - Australia/New Zealand
Outperform – expected return >10%
Neutral – expected return from 0% to 10%
Underperform – expected return <0%
Note: expected return is reflective of a Medium Volatility
stock and should be assumed to adjust proportionately
with volatility risk
Volatility index definition*
This is calculated from the volatility of historical
price movements.
Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year
– investors should be aware this stock is highly
speculative.
High – stock should be expected to move up or
down at least 40–60% in a year – investors should
be aware this stock could be speculative.
Medium – stock should be expected to move up
or down at least 30–40% in a year.
Low–medium – stock should be expected to
move up or down at least 25–30% in a year.
Indonesia banks
Financial definitions
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging,
IFRS impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests
EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average
number of shares

Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
down at least 15–25% in a year. are modelled under IFRS (International Financial
* Applicable to select stocks in Asia/Australia/NZ Reporting Standards).

Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 30 September 2019

AU/NZ Asia RSA USA EUR
Outperform 43.12% 58.72% 48.53% 52.06% 54.02% (for global coverage by Macquarie, 3.09% of stocks followed are investment banking clients )
Neutral 39.49% 28.86% 41.18% 44.19% 37.50% (for global coverage by Macquarie, 3.35% of stocks followed are investment banking clients )
Underperform 17.39% 12.42% 10.29% 3.75% 8.48% (for global coverage by Macquarie, 3.08% of stocks followed are investment banking clients)

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This publication was disseminated on 15 October 2019 at 15:34 UTC.