3 Indonesian Banks To Watch As Policymakers Attempt to Inject Further Lending Growth 26

Indonesia’s banks are booming, but underlying challenges remain

A booming economy, low credit penetration, and high margins are driving optimism in Indonesia’s banking sector. Last month, Moody’s upgraded its outlook for Indonesian banks from stable to positive, following shortly after the recent S&P upgrade for the country.

The lending rates of Indonesia’s banks have remained at high levels despite several interest rate cuts and low inflation. The Central Bank of Indonesia has cut policy rates eight times since 2014, but lower lending rates for banks have not followed. In June 2017, the average-lending rates for business loans was 11.5% and 12.5% for consumer loans.

This has directly impacted credit growth in the country. In June 2017, credit growth slowed down to 7.4%, from 9.1% during the same period last year and from its peak of 22.6% in 2012. Overall for 2017, Indonesia’s Financial Services Authority expects credit growth of 12%.

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Total assets for the banking sector have also risen nearly 4 fold in the last 10 years. Experts expect total assets for Indonesian banks to double over the next 10-15 year period as the economy continues to grow and banking penetration deepens.   

Currently, Indonesia’s banks are among the most profitable in Southeast Asia, with commercial banks reporting net interest margins of 5.4% in June 2017, the highest levels among emerging markets.

The average capital adequacy ratio (CAR) of Indonesia’s banks also remains significantly higher than the regulatory requirement of 8%. Since 2015, the CAR of Indonesian banks has remained above 20%, and was 25.1% in June.

Bank stocks to follow

Year to date, the MSCI Indonesia Index has surged 12.4% while the MSCI Indonesia Financials Index has gained 25%, outperforming broad markets. Comparatively, the Indonesian benchmark Jakarta Composite Index (JKII)(JCI) has rallied 10.7% in the year so far.

The iShares MSCI Indonesia ETF (EIDO) also provides concentrated exposure to Indonesia’s financial sector with 33% of its portfolio invested in large banks. Large-cap banks including Bank Central Asia (BBCA.JK), Bank Rakyat Indonesia (BBRI.JK), Bank Mandiri (BMRI.JK) and Bank Negara Indonesia (BBNI.JK) are among the ETF’s top ten weighted stocks. YTD, this ETF has returned 9.8%.

The three largest Indonesian banks by assets are Bank Mandiri, Bank Rakyat Indonesia . and Bank Central Asia. In 2016, these banks held assets worth $76.7 billion, $74.1 billion, and $49.9 billion respectively. Currently, shares of these banks have market caps of $23.2 billion, $27.9 billion and $35 billion, on the Jakarta stock exchange.

Bank Mandiri

Bank Mandiri is the largest Indonesian bank by assets and the third largest in terms of market cap. In 2016 the bank reported assets of $77 billion, loans of $49.9 billion and deposits of $56.3 billion.

The bank was formed in 1998 as a result of a merger between the Indonesian government and four failed state-owned banks – namely Bank Bumi Daya (BBD), Bank Dagang Negara (BDN), Bank Expor Impor (Exim), and Bank Pembangunan Indonesia (Bapindo).

Apart from the traditional commercial banking services, Bank Mandiri also provides Shariah-compliant banking services through its subsidiary, PT Bank Syariah Mandiri. In addition, its subsidiaries PT AXA Mandiri Financial Services and PT Asuransi Jiwa InHealth Indonesia provide life insurance services while PT Mandiri AXA General Insurance provides general insurance. The bank also provides underwriting and brokerage services, financing, and money remittance services through other subsidiaries in Indonesia.

In 2016, it generated revenues of $7.5 billion and net interest margins of 6%. In 2016, the bank reported return on assets of 1.4% and return on equity of 10.3%, lowest among peers.

Bank Mandiri’s shares trade on the Jakarta, Stuttgart and Frankfurt Stock Exchanges with tickers BMRI.JK, PQ9.SG and PQ9.F. The bank also trades on the OTC Markets with ticker PPERY. The bank’s Jakarta listed shares have surged 17% in 2017 thus far.

Bank Mandiri is a constituent of the Jakarta Stock Exchange’s benchmark Jakarta Stock Exchange Composite Index and also forms part of most major ETFs investing in Indonesian equities.

Bank Rakyat Indonesia

Bank Rakyat Indonesia is the second largest bank in Indonesia in terms of total assets held and the second largest in terms of market cap. In 2016 the bank reported assets of $74 billion, loans of $47.7 billion and deposits of $55.7 billion.

Bank Rakyat, formed in 1896, is one of the oldest Indonesian banks. Currently, the Indonesian government holds a 70% stake in Bank Rakyat. 30% of the bank’s equity was sold through an IPO in 2003.

Bank Rakyat specializes in the small-scale and micro-financing space and currently services 30 million retail customers through a wide network of 4,000 branches.

In 2016, it generated revenues of $8 billion and net interest margins of 8.3%, higher than the industry average. In 2016, the bank reported return on assets of 2.8% and return on equity of 20.2%.

The company’s shares are listed on the Jakarta Stock Exchange and have gained 39% in value in 2017 to date. Shares of the bank are also listed on the Frankfurt Stock Exchange with the ticker BYRA.F and on OTC Markets with the ticker BKRKY.

Bank Central Asia

Bank Central Asia (BBCA.JK) is the third largest bank in terms of assets in Indonesia and the largest by market capitalization. The bank’s shares surged nearly 4% on September 22, as the Central Bank of Indonesia cut reverse repurchase rate by 25 basis points. Bank Central Asia’s market capitalization rose to $37 billion on the Indonesian Stock Exchange, making it the largest stock by market value. Consequently, Bank Central Asia overtook Singapore’s DBS Bank as the largest Southeast Asian lender by market value.

The bank held assets worth $49.9 billion in 2016, loans of $31.6 billion and deposits of $39.4 billion.

In 2016, Bank Central Asia generated revenues of $4.8 billion and net interest margins of 7.2%, highest among its peers. The bank reported return on assets of 3.2% and return on equity of 20.4%, making it the most profitable Indonesian bank.

The bank’s shares are listed on the Jakarta Stock exchange and have gained 29% in 2017 to date. The company’s ADRs are also listed on the OTC Markets with the ticker PBCRY.

Valuations and ratings

Indonesia’s banking sector currently trades at a huge premium to Indonesian equities after their superlative performance during the year so far. Jemmy Paul, investment director at PT Sucorinvest Asset Management said that current steep valuations of Indonesia’s banks are not justified and a correction is due amongst the local banks. “Banking stocks have rallied so much this year that it is hard for investors to expect more upside to them, especially with the not-so positive outlook and the rich valuation,” he stated. “Prices have to come down from what they are right now for me to put in more money to the banking stocks.”


The MSCI Indonesia Financials Index has a price to book ratio of 2.5x and one year forward price to earnings ratio of 13.5x. In comparison, the MSCI Indonesia Index trades at a forward PE of 16.3x and price to book ratio of 2.9x, while the JCI Index trades at a forward PE 15.4x and price to book ratio of 2.5x.

Bank Qnb Indonesia, Bank Bumi Arta, Bank Artha Graha Internasion, and Bank Artos Indonesia are the most attractively priced banking stocks based on their cheap valuations. These stocks have price to book ratios of 0.1x, 0.3x, 0.4x and 0.5x are trading at the steepest discount to their peers. Meanwhile, Bank Rakyat Indo Agroniaga, Bank Central Asia, and Bank Pembangunan Daerah are currently expensive with price to book ratios of 4.8x, 4.1x and 3.9x respectively.

Major Indonesian banks have seen a number of downgrades over the past few months. Bank Central Asia was downgraded by Bahana Securities and CIMB Group after the bank’s recent outperformance. Currently, the bank has 17 hold ratings, 16 buy ratings, and 3 sell ratings.

Bank Rakyat Indonesia was also downgraded twice in August after the bank’s shares gained nearly 30%. Presently, the bank is rated buy by 21 analysts, hold by 9 analysts and sell by 5 analysts.

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