Indonesian Banks and Multifinance Companies

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1 Indonesian Banks and Multifinance Companies Refer to important disclosures at the end of this report DBS Group Research. Equity 9 Jan 2015 Size does matter Big banks to perform better in a tough environment Another challenging year Growth to remain muted BMRI is our new top pick Big banks to stay in the limelight. OJK is likely to target slow loan growth in 2015, leading us to expect deposit growth to outpace loan growth, which would ease liquidity conditions. Bigger banks with a stronger deposit franchise will have a competitive edge and be able to defend NIM. OJK and BI s stance to promote branchless banking will support transaction banking for larger banks. Smaller banks may continue to face funding cost pressure and sporadic asset quality issues. Growth to remain muted. We forecast 15. loan growth in 2015 (2014: 15.1%) and loan-to-deposit ratio will ease to 86% level for banks within our coverage (industry: 88%). Asset quality may experience a temporary deterioration, particularly SME loans in the trade industry. Banks will likely continue to book high provisions. We are expecting NIM to stay flat in We trimmed FY15F sector earnings by 3.. All in, we forecast 1 earnings growth for 2015 (2014:9.). Multifinance companies are expected to register c.1 earnings growth in 2015 (2014: 13%). Another challenging year. The fuel subsidy cut is a positive sign of sustainable long-term growth, albeit it will hurt the economy in the near-term. In response, the central bank raised the BI rate by 25bps to 7.7 in Nov 14, which may pressure banks funding costs and consequently, earnings growth. A Fed rate hike could also push up the BI rate, over and above inflationary pressure. Bigger banks would be in a better position to withstand these headwinds. The Indonesian Banks masterplan which might be released soon will discuss matters such as consolidation and reciprocal agreements with neighbouring countries. Top pick for 2015: BMRI. It would be wiser to stick to the resilient big banks as investment options for 2015 because they should perform better in an anticipated tough operating environment. We switch our top pick to BMRI (from BBRI) for BMRI had lagged its large cap peers in The key catalysts would be recovering NPLs at its Syariah unit and accelerated mortgage growth. BBRI is downgraded to a HOLD due to the risk of deteriorating quality in its special mentioned loans. Smaller banks such as BBTN and PNBN may still be hot for M&A news. JCI : 5, Analyst LIM Sue Lin suelinlim@dbs.com Christopher Daniel Wijaya Christopher@id.dbsvickers.com Indonesian banks coverage Source: DBS Bank, DBS Vickers Indonesian Banks: Earnings growth trends % 33.3% 20.9% 17.8% % F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Source: DBS Bank; DBS Vickers Indonesian Banks: loan growth trends % 23.8% % 15.1% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Industry loan growth Average loan growth Price Mkt Cap Target Performance (%) Rp US$m Price Rp 3 mth 12 mth Rating Bank Central Asia 13,125 25,520 12, HOLD Bank Mandiri 10,850 19,966 12, BUY Bank Tabungan Negara 1,205 1, FV Bank Rakyat Indonesia 11,775 22,908 12, HOLD Bank Negara Indonesia 6,075 8,935 6, HOLD Bank Tabungan Pensiunan 3,990 1,838 4,600 (10.3 (9.3) HOLD Panin Bank 1,070 2,033 1, HOLD Indonesian multifinance coverage BFI Finance Ind 2, , (1.6) BUY Clipan Finance (2.1) 6.2 HOLD % 1 1 Source: DBS Bank; DBS Vickers ed-sgc / sa- MA

2 Indonesian Banks and Multifinance Companies Indonesian banks: Going into another challenging year Fuel subsidy cut and BI rate hike. The Indonesian government raised the price of subsidised fuel by Rp2,000/liter effective 18 Nov The increment was within our and consensus expectations. However, the recent drop in the oil price to below USD85 per barrel has prompted the government to rethink the magnitude of the cut, which was at the low end of consensus estimates of Rp2,000-Rp3,000. In our previous report Indonesian Banks: A matter of time dated 20 October 2014, we highlighted that the impact of an increase in the price of subsidised fuel of this magnitude on CPI inflation is likely to be manageable. However, Bank Indonesia (BI) took a cautious stance by raising reference rates by 25bps to 7.7, mainly to safeguard against the ripple effects of inflationary pressures. There is little indication of further rates hikes and DBSV economist forecasts the BI rate will be stable until 3Q15. The willingness to cut fuel subsidies is a positive signal for sustainable long term growth, albeit it will hurt the economy in the near term. Generally, banks earnings growth tend to decline when fuel subsidies are cut (or fuel price rises), because there is a strong correlation between fuel price hikes and a rise in BI rates, and a slowdown in the overall economy. Subsidised fuel price, inflation and BI rate 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Jan 03 Sep 03 May 04 Jan 05 Sep 05 May 06 Jan 07 Sep 07 May 08 Jan 09 Sep 09 May 10 Jan 11 Sep 11 May 12 Jan 13 Sep 13 Susidized fuel price Inflation y o y BI Rate Source: DBS Bank; DBS Vickers, BI May BI also raised lending facility rate, but FASBI is stable. The central bank also raised its lending facility rate by 50bps to 8%, while the deposit facility rate is kept at 5.7. By doing this, BI is not pushing to absorb more liquidity from the financial system, while at the same time, it safeguards against the risk of excessive money supply growth. Recent developments on fuel subsidy. As of 1 January 2015, the Indonesian government has cut fuel prices to Rp7,600/liter from the previous Rp8,500/liter in November. The most important news announced is the decision on the fuel subsidy policy for The government will continue to subsidise diesel and kerosene but gasoline will no longer be subsidized. Instead, the government will only cover the distribution cost for gasoline outside of Java and Bali, which means that prices can fluctuate depending on oil prices, currency movements and local tax. The government also plans to further reduce the fuel price at the end of this month due to global oil prices falling below $48. This brings an end to the fuel subsidy overhang and the politics which goes along with it. Indonesia is just one step away from completely removing fuel subsidies altogether. BI rate, lending facility rate and FASBI rate 14% 12% 1 8% 6% 4% 2% Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 BI Rate Lending facility rate FASBI rate Source: DBS Bank, DBS Vickers, Bank Indonesia Fuel subsidy elimination will rein in banking sector growth. Loan and deposit growth are historically affected by the fuel subsidy cut, due to a slowdown in overall consumption and economy. However, the recent drop in oil prices may soften the impact of fuel price increases in the economy. The subsequent 25bps increment in the BI rate would also slow GDP growth. However, BI remains optimistic and believes the slowdown would be temporary. BI is confident of achieving % GDP growth in Meanwhile, DBSV economist maintains GDP growth forecast at 5. for 2014 and 5. for 2015, the lower end of BI s estimates. Loan growth is generally more sensitive to hikes in the fuel price and BI rate than deposits because of strong growth in the past. Going forward, as liquidity tightens compared to previous years, loan and deposit growth will be more in line. Nov 13 Mar 14 Jul 14 Page 2

3 Indonesian Banks and Multifinance Companies Subsidised fuel price vs loan and deposit growth 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Jan 03 Sep 03 May 04 Jan 05 Sep 05 May 06 Jan 07 Sep 07 May 08 Jan 09 Sep 09 May 10 Jan 11 Sep 11 May 12 Jan 13 Sep 13 Susidized fuel price Loan growth Deposit growth Source: DBS Bank; DBS Vickers, Bank Indonesia Strong possibility Fed will hike rate. A hike could trigger an increase in the BI rate over and above inflationary pressures. The Fed has ended its quantitative easing program, and is likely to raise rates this year on the back of a strengthening US economy. Former Indonesia s Finance Minister Chatib Basri predicts that the Fed rate will increase to 1.37 this year. Our economist forecast Fed rates to increase by 25bps to 0. in 4Q15. Historically, the Fed rate hike had strong correlation (8, R-squared of 64%) with an increase in the BI rate. May Impact of Fed rate hike elevated with high levels of foreign holdings. The Fed rate hike contributes to the BI rate increase since investors will find it more attractive to invest in the US if its interest rates are higher. Thus there will be an outflow of investments from Indonesia back into the US. Indonesia is very prone to this capital outflow because 38% of Indonesia s government debt and 49% of Indonesian equities are owned by foreign investors. These are hot money that can easily flow in and out of the Indonesian economy. Foreign debt holdings in Rptr Feb Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Foreign ownership Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 Domestic ownership Source: DBS Bank; DBS Vickers, Bank Indonesia May 14 Jun 14 Jul 14 Aug 14 Sep 14 Fed rate, BI rate and GDP growth 14% 12% 1 8% 6% 4% 2% Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 BI Rate Fed rate GDP Growth Source: DBS Bank; DBS Vickers, Bloomberg Finance L.P. Jan 14 Jul 14 8% 7% 6% 4% 3% 2% 1% Stick to the more resilient big banks. Big banks are expected to perform better in the uncertain business and macroeconomic environment. We see the same trend in 2014, the big banks defended NIMs and NPLs while smaller banks with weaker deposit franchise struggled with rising cost of funds and they missed earnings estimates. Our top picks for 2015 is BMRI. Operations and asset quality in Syariah unit are expected to improve and mortgages will continue to pickup. We believe that BMRI is the strongest to withstand pressure from possible further BI rate hikes and other macroeconomic headwinds with its variable loan book, focus on retail loans and strong deposit franchise. We downgraded BBRI due to the risk of deterioration in its special mentioned loans. Page 3

4 Indonesian Banks and Multifinance Companies Indonesian Banks: Big banks to perform better under tough environment OJK and BI still guiding slow loan growth. This year s slowdown in the banking industry is expected to continue until OJK guides a 16%-18% loan growth in 2015 (2014 loan growth guidance: 1-17%) assuming that GDP growth will improve to 5.8% in BI is even more bearish and is expecting growth slower than OJK s guidance of 16%-18%. OJK believes that the liquidity position will improve and deposits will grow by 18%-19% in 2015 driven by the deposit rate cap and stabilizing political conditions. BI guides slower customer deposits of 14%-16% and one of the factors that will be positive for liquidity and deposit growth is the reallocation of subsidized fuel budget which will boost capital inflow and improve current account deficit as well. Most of the big banks are still preparing their business plan for BBRI states that OJK s loan growth target is in-line with their plan so far. BBCA remains more pessimistic and targets loan growth of 13%-1 this year on the back of slower deposit growth of 12%-13% due to the tightness of liquidity in the system. We are forecasting a FY15 loan growth target of 15., a slight pick-up from this year s growth. Indonesia banks: Loan growth trend % 23.8% % 15.1% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Industry loan growth Average loan growth % 1 Loan growth to inch up in Indonesia s economy has continued to slow down with 3Q14 GDP growth coming in at +5.01% y-o-y. This is the slowest quarterly growth since BI estimates 2014 GDP growth at 5.1%-5.2%. Loan growth had also remained weak (9M14: +8.1% YTD) across all loan types. Consumption loans only grew +8.2% YTD with banks indicating mortgage growth will be flat for the year due to soft demand. Commercial loans (+8.7% YTD) and investment loans (+76% YTD) are also muted due to sluggish business activity and banks being reluctant to disburse more loans in the tight liquidity environment. We expect loan 1 growth to improve slightly to 15.4% in 2015 on the back of easing liquidity and the allocation of funds to the agriculture, fisheries, healthcare and infrastructure sectors. The Big 4 banks recently disbursed a 10-year loan amounting to Rp3.04tr to PT Kereta Api Indonesia (Indonesian government train agency) to fund their expansion, i.e. build railroads and acquire more trains. We should see more of these types of infrastructure funding in 2015 once the fuel subsidy funds have been reallocated to the infrastructure sector, in line with the current government s plan. BI expects FY15 GDP growth to come in at %, while DBS expects more conservative growth of. Indonesia banks: Industry loan growth by type Sep 14 Investment Working Capital Consumption Minimum requirement for micro & SME loans. Starting 2015, BI will implement the regulation to force banks to set micro and SME loans at a minimum of of total loans. (Refer to appendix for more details). This will not affect banks within our coverage currently. However, OJK plans to increase that to 2 by 2020, and this will be a challenge for BBCA which is not aggressively competing for micro and SME loans. This regulation is currently being reviewed by the government as corporate-focused banks such as BBCA is of the view that the regulation is not feasible for them. In addition, BI plans to offer incentives to increase micro and SME loans in order to ramp up loans in these sectors, under its financial inclusion efforts. Banks meeting the minimum requirement may be offered incentives. However the details have not been released. Page 4

5 Indonesian Banks and Multifinance Companies Slower loan growth amid tight liquidity. Most of the banks view that the operating environment in Indonesia now is different to what it was in the past. About five years ago, loanto-deposit ratio was still comfortable at 7-8 and loans grew by 23%-3, while deposit growth was slower at 1-2. Currently, the liquidity conditions have eased although loan-to-deposit ratio is still high (9M14 LDR: 88.9%). Banks will have to balance loan and deposit growth to preserve liquidity going forward. We believe big banks are more capable of balancing liquidity and delivering sustainable growth in the new banking environment. BBTN and BTPN will continue to rely on alternative sources of funding to maintain liquidity. We forecast deposit growth will be in line with loan growth. Indonesian Banks: Deposit growth trend % 16.8% 15.3% 13.9% % F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN Average deposit growth Industry deposit growth Larger banks with a strong deposit franchise have a competitive edge. Larger banks generally have a stronger deposit franchise, and are better positioned to defend NIM. In 9M14, the big 4 banks recorded an average CASA ratio of 57%, while the ratio for non-big 4 banks was lower at 4. FY14F CASA growth for the Big 4 banks is expected to be relatively strong at +16% y-o-y, while the non-big 4 banks will record slower CASA growth of +9%. CASA growth is expected to remain muted in 2015 due to tight competition for funding from the government for its proposed infrastructure and maritime projects. The government usually conducts fundraising activities in the first half of the year. Despite expecting GDP growth recovering to 5. in 2015, we forecast CASA growth will remain sluggish at +14% y-o-y, and pickup in 2016 to +17% y-o-y Indonesian Banks: CASA growth vs GDP growth F 2015F Average CASA growth Industry CASA growth GDP growth Indonesian Banks: CASA composition % 61% 53% 62% 46% 14% 63% 61% 54% BBCA BMRI BBRI BBNI BBTN BTPN PNBN Average Industry CASA ratio CASA ratio Liquidity will remain challenging for smaller banks. Liquidity will be tight, especially for smaller banks, following the fuel price and BI rate hikes. Banks have indicated that there is usually tight competition not only against other banks, but also against the government for funding in the first half of the year when the government usually front loads fundraising and bond issuances. The government needs Rp450tr worth of funding and 8 of this will come from local sources. OJK recently imposed a maximum cap on deposit rate, of BI rate + 225bps for BUKU III banks, and BI rate + 200bps for BUKU IV banks for deposits over Rp2bn, and a maximum deposit rate equivalent to the LPS rate of 7.7 for deposits below Rp2bn (LPS rate customer deposits with rates less than or equal to the LPS rate will be insured by the LPS). This deposit rate cap could prompt the switching of deposits from BUKU III banks to safer BUKU IV banks since the interest rate differential has been narrowed to 25bps. We forecast FY15 LDR for the non-big 4 banks will remain high at 9, while the Big 4 banks will maintain a lower level of LDR at 84%. We forecast overall LDR will reach 86% for the banks under our coverage. BI is optimistic loan and deposit growth will will balanced and the LDR will be Page 5

6 Indonesian Banks and Multifinance Companies stable at c.9 in The deposit rate war may be over, and banks have been shoring up liquidity and growing conservatively in FY14, which would ease LDR in FY15 especially for the big banks. Smaller banks might have to rely on issuing securities for additional funding. New loan-to-deposit (LDR) calculation will benefit small-mid size banks. Along with the BI rate hike, BI plans to provide means to promote funding and financial deepening in the market. BI is preparing to adjust the LDR calculation to include securities issued by banks in order to provide banks with sources of funding other than customer deposits. Basically, BI is now looking at the loan to funding ratio (LFR) instead of the conventional LDR. The new LDR calculation will boost the capacity of banks to ramp-up loan growth while maintaining liquidity. Several banks such as BBTN and BTPN have implemented this LDR calculation. Indonesian Banks: Loan-to-deposit ratio trends F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Industry Average (non Big 4) Average (Big 4) LCR regulation will be tested. BI will test the liquidity coverage ratio (LCR) starting this year with a minimum requirement of 6. The test for BUKU IV and foreign banks will start January 2015 and BUKU III in July. Formal implementation will start in January 2016 for BUKU IV banks and branches. BUKU III and foreign banks will follow in July The minimum LCR ratio would start at 7 and progressively increase to 10 by December 2018 for BUKU III, BUKU IV and foreign banks, and December 2019 for all the other banks. (Refer to appendix for details). Currently, the average LCR in Indonesia s banking industry is at a comfortable 9 and liquidity position is sufficient. Banks categorised as BUKU III, BUKU IV or foreign banks currently have high LCRs. For example, BBRI s LCR is over 25 and BBCA s is 263%. Larger banks should be able to defend NIM. The BI rate hike may pressure cost of funds, but OJK is hoping that bank s deposit rates will not follow. Several banks indicated that they will wait to see the impact of higher subsidised fuel price on inflation and how deposit customers react. The banks plan to monitor customer deposits closely, with any material reduction possibly prompting a deposit rate hike. Banks reiterated that, theoretically, the deposit rate cap should reduce cost of funds, but the initiative remains difficult to enforce and they are waiting to see the impact of the rate cap on competitors before reducing their own rates. With the current BI rate hike, easing cost of funds arising from the deposit rate cap is virtually cancelled out. Lending rates have also been re-priced to match deposit rates in FY14. Banks have not given guidance on further re-pricing of loans following the subsidised fuel price increase and BI rate hike, and most banks are waiting to see how the market reacts. Big banks should be able to defend NIM despite possible cost of fund pressures following the BI rate increase. On the other hand, interest rate-sensitive smaller banks such as BTPN and BBTN might struggle. Indonesian Banks: NIM trend 16% 14% 12% 1 8% 6% 4% 2% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Industry Big banks with extensive transaction banking infrastructure will record stronger growth of fee-based income. Indonesian banks continue to register strong growth in fee-based income. Most of the big banks have set up transaction banking infrastructure such as online banking, and are increasing EDCs and retail transaction banking, increasing ATM outlets as opposed to branches, and several other initiatives. Insurance tie-ups will also boost fee-based income, with PNBN and BBTN starting to sell bancassurance products soon, following the footsteps of BBNI and BMRI. BBCA have signed several agreements with American Express as well as Public Bank to boost fee-based income growth to 18%-2 (from 1 previously). Big banks such as BMRI also mentioned that with their extensive network and customer base, they will focus on cross-selling products such as insurance, as well as tapping into the value chain of 7% 6% 6% 6% 6% 6% Page 6

7 Indonesian Banks and Multifinance Companies existing customers to generate more transaction banking. Going forward, banks will focus on growing fee-based income until they can cover operating expenses. Indonesian Banks: Fee based income growth % 28.6% 10.7% 8.8% % F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN Average BI hedging regulation. BI released a regulation which will require companies to hedge 2 of their external debt due within 3-6 months in This hedging requirement will rise to 2 in Additionally the central bank is requiring a minimum liquidity ratio of 5 in 2015 and 7 in 2016 three months prior to maturity. Finally, beginning 2016, companies undertaking foreign loans will be required to have a credit rating of at least BB- (S&P) or Ba1 (Moody s). The big 4 banks indicated that they have the necessary infrastructure and are ready to undertake forex hedging transactions. Stateowned banks such as BBRI and BBNI have been in talks with state-owned companies such as PLN, Garuda and PGAS for possible hedging transactions. This could potentially further boost fee based income in the future. Indonesian Banks: Fee based as a % of revenues % % % 21.6% 21.7% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Increase in ATM fees. Starting 1 November, banks in the ATM Bersama and ATM Prima networks (which includes all the banks under our coverage) increased ATM fees by c.3. This has been long overdue and is needed to fund opex. BI has indicated that this is one-off and fully justified. The higher ATM fees had also contributed to November s inflation of 6.2%. Banks indicated that the increase has minimal impact on transaction volume and was not a large burden for consumers. The higher ATM fees will benefit bigger banks with a strong transaction banking franchise and wider network, such as BBCA and BMRI. Indonesian Banks: ATM tariffs Type of Transaction Old Tariff New Tariff Balance check 2,000 4,000 Transfer and 5,000 7,500 withdrawal Failed transaction 2,000 3,000 Source: DBS Bank; DBS Vickers OJK and BI promoting branchless banking. OJK recently released regulations for branchless banking. Previously, only BUKU IV banks were allowed to conduct branchless banking, but OJK now allows all banks operating in East Java with the necessary infrastructure to provide branchless banking services. Branchless banking will allow banks to enter remote markets they could not previously access, and offer micro loans and CASA, as well as other products such as micro insurance. Many banks, including BBRI and BMRI, have started to recruit agents and launch branchless banking initiatives. Bigger banks with a stronger regional presence, franchise and better infrastructure, will benefit more from branchless banking. Other smaller banks such as BTPN have also expressed interest in branchless banking. However, the impact of branchless banking operations will not be felt in the near-term because it would take time to recruit, train and deploy agents. Capital remains healthy. Capital is not an issue for Indonesian banks, with all the banks recording an average CAR of above 1. All the capital are also Tier-1 capital which comprises almost 9 of total capital and is mostly in the form of core capital (no hybrid instruments). Basel III buffer requirements such as the capital conservation buffer will be implemented in phases starting The counter-cyclical buffer will also be implemented starting The only Basel III requirement which will be effective in 2015 is the minimum total capital ratio of 8%, tier 1 capital ratio of 6%, and core capital of 4.. There might also be extra capital surcharges of 1%- 2. for systemically important financial institutions (refer to appendix for more details). All the Indonesian banks under our coverage are comfortably above the minimum level, especially if 10 of retained earnings will be included in the risk weighted asset calculation under Basel III. Currently, only 5 is included. Page 7

8 Indonesian Banks and Multifinance Companies Indonesian Banks: CAR F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Industry Indonesian Banks: Basel III capital requirements timeline From 2019 onwards Core capital Tier 2 capital Countercyclical capital buffer Source: DBS Bank; DBS Vickers, BI Additional Tier 1 capital Capital conservation buffer Consolidation of SOE banks. The OJK has reportedly proposed to the MSOE to consolidate state-owned banks. There are no details yet, but the main concept would be to consolidate BMRI, BBNI, BBRI and BBTN into two banks: one to focus on corporate exposure, and the other on micro and retail loans. The Deputy Minister of SOE, Gatot Trihargo, had confirmed the 19% 19% 18% 18% 17% 17% 16% 16% 1 1 ministry is in talks with OJK to strengthen banking capital ahead of the full implementation of the AEC. The authorities want to complete the consolidation before Our channel checks reveal that the state-owned banks are not aware of any updates regarding the consolidation, and there have been no further announcements by the OJK. Banks conglomeration regulation. OJK recently published a new rule for banking conglomerates with integrated financial services. OJK will start to enforce the rule in July The parent financial services company will be responsible for the subsidiaries good corporate governance and risk management. This includes appointing a special director to oversee the individual subsidiaries. BBRI is ready to comply with this regulation and BBNI already has a director to oversee the operations and capital of its subsidiaries. OJK will also impose minimum capital regulations for bank s subsidiaries by this year. Indonesia banking masterplan. OJK will release the financial services masterplan which will be the roadmap for Indonesia s financial services industry. OJK hopes that Indonesian financial services will remain competitive going towards the AEC which starts at the end of 2015 for non-bank financial services and 2020 for banks. The agenda will discuss the integration of financial services companies and reciprocal arrangements with other nations. OJK targets to reduce the number of banks by 5 within the next 10 years. The masterplan will also discuss foreign ownership policies, which had also been discussed previously. The consolidation of Bank Pemerintah Daerah (BPD) and the role of BPDs will also be discussed. Other topics on the agenda include the dividend policy for state-owned banks and synchronisation of regulations for banks and other financial institutions such as insurance and multifinance. Page 8

9 Indonesian Banks and Multifinance Companies Indonesian Banks: A challenging year ahead Asset quality may experience temporary deterioration after fuel subsidy cut. BI s deputy governor, Halim Alamsyah, says that a fuel subsidy cut of Rp1,000 would increase NPL ratio by 10-20bps, which means 20-40bps with the Rp2,000 cut. However, due to recent developments of lower fuel prices and a possible further decrease due to the weak global oil prices, the impact may not be too significant. Historically, absolute NPL amounts increased following a fuel price and BI rate hike, as these would slow down the whole economy. The banks have stated that NPL formations would likely be in consumer and SME loans. The impact is only expected to be temporary, and we believe the average NPL ratio of the banks within our coverage will taper down to 1.9% from 2. in The fund reallocation from the fuel subsidy will be positive for the economy in the long run. Indonesian Banks: NPL trend 6% 4% 3% 2% 1% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Industry Absolute NPL and fuel price 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Feb 03 Oct 03 Jun 04 Feb 05 Oct 05 Jun 06 Feb 07 Oct 07 Jun 08 Feb 09 Susidized fuel price Oct 09 Jun 10 Feb 11 Oct 11 Jun 12 NPL Absolute Feb 13 Oct 13 Jun % 3% 3% 2% 2% 1% 1% 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Banks will still book high provisions. Most banks will continue to book high provisions in the difficult business environment this year. Through our channel checks, most banks preferred to be conservative and book high provisions, and recover them later. Banks which are exposed to the mass market, such as BTPN, PNBN and BBRI, have guided for higher provisions for this year on expectations of higher NPLs in their micro and SME loan books following the fuel price and BI rate hikes. Other banks such as BBNI and BBCA expect provision levels to be the same as We forecast cost of credit will stay flat at 3.2% while loan loss coverage will rise to 177% (2014:16) on the back of an uncertain macroeconomic environment and probable NPL increases due to fuel price and BI rate increases. Indonesian Banks: Cost of credit 8% 7% 6% 4% 3% 2% 1% 5.2% 4.3% 3.8% 3.1% 2.9% 3.2% 3.3% 3.3% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN Average Indonesian Banks: Loan loss coverage ratio % 157% % % 182% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN Average 6% 4% 3% 2% 1% Increase in minimum wage will not hurt opex. Minimum wage will be increased again this year by an average of 13%. The DKI Jakarta province will increase minimum wage by 1. The banks have indicated that this would not hurt opex as most of their employees are paid above the minimum wage. Banks have guided that any opex increases will be seasonal and in line with an expanding branch network and staff force. Any reduction in opex arising from branchless banking or e-banking initiatives will only be felt several years down the road. Page 9

10 Indonesian Banks and Multifinance Companies Indonesian Banks: Opex growth trend % 2 16% 13% 12% 1 16% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Slower than expected growth. A downside risk for the banking industry this year is slower-than-expected growth due to the fuel price and BI rate hikes. The Fed rate hike is another risk, and could pressure BI to raise rates. Higher cost of funds would hurt our earnings estimates. This year, loan growth will likely miss OJK s target of 15-17% (9M14: +8% YTD) as banks had remained conservative in underwriting new loans in order to maintain their liquidity positions. The same situation could occur this year, especially if BI raises the rate again. OJK may cap micro lending rate. OJK is currently discussing with KPPU (translated as Fair Business Competition Commission) to cap micro lending rates following a cap on deposit rates. Previously, OJK had also implemented minimum and maximum rates for insurance premiums. OJK is worried that if the micro lending rates for big banks are high, they would be even higher for smaller banks. OJK is also worried about NPL formation arising from excessive micro lending rates. But OJK also realises it would be difficult to cap lending rates since they are decided by the market. As a result, OJK will monitor margins to ensure banks reap a fair margin. KPPU is still conducting an investigation. Banks have not received any updates on the micro lending rate cap. BBRI is confident they will not be affected because their rate for micro loans at 19.2 is one of the lowest in the market. BBRI indicated that the cap would only be a deterrent to competitors who want to enter or expand into micro loans, as they may no longer find the micro segment attractive Indonesian Banks: Micro lending rates Banks Lending rate PT Bank Mandiri Tbk 19.5 PT Bank Rakyat Indonesia Tbk 19.2 PT Bank PAN Indonesia Tbk 20.56% PT Bank Tabungan Pensiunan 21.14% Nasional Tbk PT Bank Danamon Tbk 20.94% PT Bank Pundi Indonesia Tbk 22.56% PT Bank Sinar Harapan Bali 22.34% PT Bank Mutiara Tbk 20.5 PT Bank Ganesha 20.16% PT Bank CIMB Niaga Tbk 20.0 PT Bank Maspion Indonesia 19.5 PT BPD Kalteng 19.09% PT BPD DKI 19.0 Source: DBS Bank; DBS Vickers, Bank Indonesia, Companies OJK urging banks to reduce lending rates. In addition to the micro lending rate cap, OJK is also urging banks to reduce lending rates for normal loans by requiring them to include the program in the banking business plan to be submitted. OJK indicated there is still a 100bps differential between deposit and lending rates, suggesting room to reduce lending rates by about 25bps. The banks responded they would wait for a clearer market direction before reducing lending rates. Meanwhile, BBCA had started to reduce mortgage rates earlier. BBCA and BMRI do not see much room to reduce lending rates, suggesting any further reductions would be minimal. Indonesian Multifinance: Slower demand Growth has been subdued. Financing growth has been weak this year because of soft demand for consumer financing. Heavy equipment financing growth has been flat as expected, as commodity prices have not recovered. Cost of fund pressures were also an issue in the multifinance sector although multifinance companies have passed on incremental financing cost to consumers. The multifinance association (APPI) forecasts that growth will pick up slightly in 2015 but remain slow at 1. This scenario takes into account the fuel price and Fed rate hikes. Multifinance companies have been intentionally reducing their heavy equipment leasing portfolios due to weak commodities prices and rising NPL to these sectors. Heavy equipment leasing loans fell -2.2% YTD in 9M14. Consumer financing also experienced weak demand as 2W sales only grew 3.4% y-o-y in 10M14 and 4W sales 2.7% in 9M14. Total consumer financing only grew 7.7% y-o-y in 9M14. Factoring segment continued to grow (10M14: +3 y-o-y) but the market is very small. CFIN s factoring receivables fell 17% y-o-y in 9M14. Page 10

11 Indonesian Banks and Multifinance Companies Multifinance Companies: Financing trends 400, , , , , , ,000 50,000 27% 4% 31% 32% 23% Sep 14 Consumer financing Leasing Factoring Total Growth Very slow growth in leasing. Commodity prices are still weak and China has imposed import taxes of between 3% and 6% on several commodities, which will soften demand further. Although Indonesia is not affected by this tax due to the China-ASEAN free trade agreement, coal prices will be indirectly affected with demand for coal mining in Australia falling. Komatsu unit sales is expected to be slow (- y-o-y) in Komatsu s product mix will also switch away from big tractors for mining to either smaller mining tractors or machinery for non-mining functions such as agriculture, construction and forestry. As a result, Komatsu revenue is expected to decline (-1 y-o-y) in Heavy equipment leasing will continue to slow down in Komatsu unit sales trends 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 3,111 5,404 8,467 6,202 4,200 3,800 3,600 3, F 2015F 2016F Komatsu sales (units) % growth Consumer financing continues to drive financing. Consumer financing will remain the main loans driver due to slow growth in leasing and limited factoring business. We expect mild growth (+ y-o-y) in 2W sales in W is a basic necessity in Indonesia and 2W demand/sales usually reflects GDP growth. We are keeping a conservative forecast in view of the foreseeable macroeconomic headwinds this year. 4W sales is expected to grow faster (+7.7% y-o-y) in 2015 driven by the LCGCs. We forecast that LCGC growth will be strong (+2 y-o-y) in BFIN and CFIN have both indicated that they would focus on consumer financing this year. Multifinance Companies: Financing growth trends Sep 14 Consumer financing Leasing Factoring Total Growth Multifinance Companies: 2W sales forecast 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 5,852 7,373 8,013 7,064 7,744 8,131 8,538 8, F 2015F 2016F 2W sales (000 units) % growth Multifinance Companies: 4W sales forecast 2,000 1,800 1,600 1,400 1,200 1, , , , , , F 2015F 2016F 4W sales (000 units) LCGC sales (000 units) % growth Page 11

12 Indonesian Banks and Multifinance Companies New auto regulations. There is news that the provincial government of DKI Jakarta will cap the age of private vehicles at 10 years in order to reduce traffic and fuel emissions. The provincial government will also increase vehicle tax in the DKI Jakarta province by 33%-15 by early this year in order to increase tax revenues as well as reduce traffic. We believe the 10-year age cap on private vehicles will be difficult to implement, while the increase in vehicle tax had not significantly affected 4W and 2W demand previously. But coupled with the BI rate hike and economic slowdown this time around, the increase may have some impact. Indonesian Multifinance: New auto tax Current law Revised law % Change 1st vehicle tax rate 1. from selling price 2% from selling price 33% 2nd vehicle tax 2% from selling price 4% from selling price 10 rate 3rd vehicle tax 2. from selling price 6% from selling price 14 rate 4th vehicle tax 1 from selling 4% from selling price 15 rate price Source: DBS Bank; DBS Vickers BFIN and CFIN have comfortable capital levels, low levels of NPL, and stable operating expenses. Minimum down payment will also be regulated at 2 for 2W and commercial 4W vehicles, and 2 for non-commercial 4W vehicles. Larger business scope. OJK has expanded the business scope of multifinance companies, allowing them to finance working capital and multipurpose loans. OJK indicated that multifinance companies need at least Rp1tr capital in order to be allowed to finance infrastructure or maritime projects. Several multifinance companies, including Mandiri Tunas Finance, have expressed interest to finance ships in line with the new government s maritime focus. BFIN also expressed interest in financing infrastructure projects but will start by financing (smaller) supporting projects because of limited capacity. Multifinance companies will also be able to increase fee-based income by selling other financial products such as mutual funds and insurance. Cheaper forex funding an option. Forex funding is on the rise for multifinance companies with domestic liquidity tight and cost of funds high in Indonesia. The multifinance industry foreign borrowings rose 14% y-o-y to Rp115.5tr as of 9M14, while domestic borrowings fell 3.1% to Rp137.1tr. BFIN indicated that they prefer foreign funding to maintain margins. The share of foreign funding has increased to 68% of total borrowings and most of these loans are hedged. On the other hand, CFIN does not have exposure to USD borrowings yet and their strategy is to shop for the lowest local rates available. Indonesian Multifinance: Multifinance bank borrowings Company IDR borrowings IDR interest rate USD borrowings USD interest rate BFI Finance Rp1.29tr Rp2.17tr % Clipan Finance Rp1.68tr 9.83%-11.19% n/a n/a Astra Sedaya Finance Rp2.09tr Rp14.80tr 1.73%-2.51% Federal International Rp2.20tr % Rp11.24tr Finance Tifa Finance Rp628.8bn Rp101.26b n BII Finance Center Rp328.94bn 9.94%-9.78% Rp23.22bn 4.0 OJK to further regulate multifinance companies. OJK will revise the multifinance regulation before the end of this year in order to maintain similar standards as banks. OJK has proposed that multifinance companies report and comply with capital adequacy ratio (minimum 1), ROA, operating expense to operating income ratio, gearing ratio (maximum 10x) and nonperforming financing (NPF) ratios (maximum of ). OJK will also regulate provision requirements. The impact on multifinance companies under our coverage is minimal as both Page 12

13 Indonesian Banks and Multifinance Companies Valuation and recommendation Normalised earnings in Earnings growth is expected to recover and grow by 1 in 2015, following a dip (+9.8% y- o-y) in was the transition period to a new banking environment with higher cost of funds, tighter liquidity, and slower loan growth (to match deposit growth). By 2015, banking operations should have adjusted to these changes and earnings should normalise. ROE is expected to dip to 19%. Indonesian Banks: Earnings growth trend % 33.3% 20.9% 17.8% % F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Indonesian Banks: ROE trend % % % 19.3% % F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Growth to remain muted. We forecast 15.4% loan growth in 2015 (2014: 14.7%) and loan to deposit ratio will ease and stabilise at 83-84% for banks within our coverage. Asset quality may experience a temporary deterioration, particularly SME loans in the trade industry. Banks will still likely book high levels of provisions. Expense growth may stay elevated due to the minimum wage regulation. While OJK has imposed a deposit rate cap on banks since 4Q14, the increase in the BI rate has largely offset savings from lower cost of funds. This may pose downside risk to our NIM assumptions. We expect 22% 21% 21% % 19% 18% 18% NIM to remain flat at 6.1% in We nudged down FY15- FY16F earnings after taking into account the BI rate hike and possible further rate hikes in the uncertain macroeconomic environment. Cost of funds and provisions are expected to remain high. All in, we forecast 1 earnings growth for 2015 (2014: 9.). Multifinance companies should see earnings grow slower in the 1 range in Indonesian Banks: NIM trends 16% 14% 12% 1 8% 6% 4% 2% F 2015F 2016F BBCA BMRI BBRI BBNI BBTN BTPN PNBN BDMN Average Industry Stick to big banks: top pick BMRI, downgrade BBRI to HOLD. We learnt from 2014 that smaller banks found it difficult to cope under tough macroeconomic conditions, rising cost of funds and tight liquidity. We believe the banking industry will face more headwinds, including competition for funding and possibly a Fed rate hike which could push up the BI rate further. Our top pick is BMRI. The Syariah unit and consumer loans will turnaround this year driven by resolution to the NPL issues and operational improvements, and arecovery in mortgage loans. 78% of BMRI s loan book is also on variable rate, suggesting they can easily reprice up loans and defend NIM. The shift to higher yielding retail loans and a strong deposit franchise (9M14 CASA ratio: 61%) would also give the banks the capability to increase NIM. We also downgraded BBRI to HOLD due to the risk of deterioration of special mentioned loans to NPLs. BBRI has improved its liquidity position by aggressively growing time deposits. (9M14 LDR: 8). It has also managed to keep NPL ratio at below 2., although the high levels of special mention loans (9M14: 6.) is a concern. We believe that NPL formations may be an issue in a tough economic environment. Smaller banks such as BBTN and PNBN may still be hot for M&A news. 7% 6% 6% 6% 6% 6% Page 13

14 Indonesian Banks and Multifinance Companies Indonesian Banks: Rolling forward P/BV band x SD, SD, 2.14 Mean, SD, SD, 1.06 Cautious on multifinance companies: still prefer BFIN. Multifinance companies had been pressured with higher funding cost on their bank borrowings and bond issuances in 2014, but had successfully repriced loans and pass on the higher costs to consumers. Multifinance companies claim the fuel price hike would only temporarily affect 4W demand, and that 2W demand remains resilient. In terms of cost of funds, they do not believe that the fuel price hike would contribute to a substantial BI rate increase. But a Fed rate hike remains the wildcard that could be a concern for multifinance companies. Both BFIN and CFIN have started to rein in their heavy equipment leasing businesses and will continue to do that this year. We cut FY15-16F earnings for multifinance companies by 5-1 after adjusting for slower bookings and higher cost of funds. For exposure to the multifinance sector, we prefer BFIN over CFIN due to its unique business model. CFIN struggled with its unique factoring business due to limited market demand. BFIN is also managing cost of funds better by utilising lower-cost hedged USD loans. The prospect of a recovery in the commodities market should trigger a re-rating for both multifinance companies, but this is unlikely to happen in Indonesian Banks: Peer valuation table Banking Group Market cap Price Target Price Rating PE (x) CAGR PBV (x) ROE (%) Net div (%) (US$bn) (Rp/s) (Rp/s) FY13A FY14F FY15F ^ (%) FY13A FY14F FY15F FY14F FY14F Bank Central Asia 19,137 13,125 12,500 Hold 16.2x 14.2x 12.2x x 3.1x 2.6x % Bank Danamon* 2,948 4,610 NA NR 10.7x 14.1x 11.8x x 1.3x 1.2x 10.3% 2.4% Bank Mandiri 14,731 10,850 12,200 Buy 9.8x 9.3x 7.8x x 1.8x 1.6x 21.6% 3.8% Bank Negara Indonesia 5,674 6,075 6,400 Hold 7.6x 6.7x 5.8x x 1.2x 1.1x 19.8% 4. Bank Rakyat Indonesia 14,451 11,775 12,600 Buy 8.2x 7.2x 6.5x x 1.7x 1.4x % Bank Tabungan Negara 748 1, Fully Valued 5.7x 8.5x 7.3x x 0.7x 0.7x 9.7% 3. Bank Tabungan Pensiunan Nasional 2,128 3,990 4,600 Hold 11.7x 11.9x 11.1x x 2.1x 1.7x 17.1% 0. Panin Bank 1,227 1,070 1,230 Hold 6.6x 5.9x 4.9x x 0.7x 0.6x Weighted average 11.2x 10.4x 9.0x 2.5x 2.1x 1.8x 21.4% 2.9% Simple average 9.5x 9.7x 8.4x 1.8x 1.6x 1.4x 17.4% 2.4% Weighted average (ex BBCA) 8.9x 8.6x 7.5x 1.9x 1.6x 1.4x 20.7% 3.2% Simple average (ex BBCA) 8.6x 9.1x 7.9x 1.6x 1.4x 1.2x 16.6% 2. Buy (B), Hold (H), Fully Valued (FV), Not Rated (NR) ^ Refers to 2-year EPS CAGR for FY13-15F * Based on Bloomberg consensus Source: Bloomberg Finance L.P., DBS Bank, DBS Vickers Page 14

15 Indonesian Banks and Multifinance Companies Indonesian Banks and Multifinance: Catalysts and risks TP and GGM Company Rec basis assumption % Key points Bank Mandiri BUY Rp 12,200 ROE 22.5 Investment thesis: A bank for everyone across all segments; growing retail business aimed to lift NIM 2.5x FY15 BV growth 10.5 Catalyst: Strong performance by subsidiaries; possible inorganic expansions; reduction in recap bonds 12.5x FY15 EPS COE 15.3 Risk: Recap bonds may swing NIM down; asset quality issue with special mention loans on an uptrend Bank Rakyat Indonesia HOLD Rp 12,600 ROE 23.7 Investment thesis: Micro lending to remain resilient; tapping into distant and rural areas 2.5x FY15 BV growth 10.4 Catalyst: Initiation of Teras Kapal (mobil ship branch) to reach rural areas; launching of satellite 12x FY15 EPS COE 15.7 Risk: Spike in special mention loans; slow down in micro lending; asset quality for small commercial loans Bank Central Asia HOLD Rp 12,200 ROE 23.7 Investment thesis: Strong franchise provides low cost of funds; strong corporate loans due to relationships 3.4x FY15 BV growth 10.5 Catalyst: Maintain good liquidity position amidst tight environment; CASA composition remains highest 16x FY15 EPS COE 14.4 Risk: Losing edge in its transaction banking franchise for low cost funding Bank Negara Indonesia HOLD Rp 6,400 ROE 19.0 Investment thesis: Expansion of non-interest income; tapping suppliers of SME clients for growth 1.9x FY15BV growth 10.4 Catalyst: Improvement in non-interest income arising from insurance tie-up and fee income strategy 10x FY15 EPS COE 15.5 Risk: Asset quality of micro loans; unsuccessful insurance partnership Bank Tabungan Pensiunan HOLD Rp 4,600 ROE 17.9 Investment thesis: Growing micro and productive poor Syariah financing; cost of funds has peaked for now Nasional 1.8x FY15 BV growth 10.0 Catalyst: Piloting expansion into informal SMEs; SMBC to provide alternative funding option 11.6x FY15 EPS COE 14.4 Risk: Change in business direction by SMBC Panin Bank HOLD Rp 1,100 ROE 14.0 Investment thesis: Strong SME lenders; resilient through the cycle 1.2x FY15 BV growth 9.0 Catalyst: Conservative focused strategy in SMEs; potential change in shareholder (ANZ) 10x FY15 EPS COE 13.1 Risk: High loan-to-deposit ratio may limit growth Bank Tabungan Negara FULLY Rp 940 ROE 13.0 Investment thesis: new subsidized mortgage schemes; new initiatives to tackle NPL; turnaround imminent VALUED 0.9x FY15 BV growth 7.7 Catalyst: Growth of non-subsidized mortgages; turnaround of NPLs; CASA initiatives 8x FY15 EPS COE 14.7 Risk: Further NPL formations due to the floating of non-subsidized mortgages this year BFI Finance BUY Rp 3,100 ROE 15.7 Investment thesis: Focus on consumer financing, ample domestic and foreign funding 0.9x FY15 BV growth 9.9 Catalyst: Working capital financing going forward, commercial 4W to drive growth, potential M&A 8x FY15 EPS COE 14.5 Risk: Demand and cost of fund risk from further increase in BI rates Clipan Finance HOLD Rp 490 ROE 14.5 Investment thesis: Unique factoring business, cutting down on heavy equipment leasing 0.5x FY15 BV growth 12.0 Catalyst: Revival of growth in the unique factoring business, potential to finance working capital loans 4x FY15 EPS COE 16.8 Risk: Further NPL formations due to the floating of non-subsidized mortgages this year Page 15

16 Indonesian Banks and Multifinance Companies Appendix Indonesian banks and multifinance: Proposed regulations for 2015 Institution Subject Description Bank Indonesia Hedging forex debt 1) BI requires 2 of external debt (for all companies) due within 3-6 months to be hedged in This requirement will rise to 2 in ) BI will require firms to have liquidity ratios of 5 in 2015 and 7 in 2016, three months prior to forex debt maturity. 3) Beginning 2016, firms that borrow foreign debt must have a credit rating of at least BB- or Ba1 Bank Indonesia and OJK Bank Indonesia Bank Indonesia E-money and branchless banking Minimum micro and SME loans Change in LDR calculation Branchless banking agents will facilitate registration, disburse micro loans, micro insurance topup, payments or deposits and other services. Limit for micropayment is Rp5mn for registered e- money, transaction limit is Rp20mn per month. Licenses for branchless banking will be offered to banks with a risk profile of 1, 2 and 3, have a network in East Indonesia, and have supporting infrastructure for communication and branchless banking. Agents must be well-trained and licensed. Minimum micro and SME loans at of total loans for This will be increased progressively to 1 of total loans in 2016, 1 in 2017 and 2 in 2018 BI will extend the definition for deposits in the LDR calculation by including securities issued by banks. Bank Indonesia LCR Implementation First phase: Starting 31 December 2015, minimum LCR of BUKU IV banks and foreign banks will be 7. This will increase every year until it reaches 10 by 31 December Second phase: Starting 30 June 2016, minimum LCR of BUKU III banks will be 7. This will increase every year until it reaches 10 by 31 December Bank Indonesia OJK OJK Basel III Capital Requirements Timeline Financial conglomeration Multifinance regulation Third phase: Starting 30 June 2017, minimum LCR of other banks not included in the first and second phase will be 7. This will increase every year until it reaches 10 by 31 December Starting 1 January 2014: Banks should build towards 6% tier 1 and 4. core tier 1 capital, minimum CAR is 8% for banks with a risk profile rating of 1, 9-1 with a risk profile rating of 2, 10-11% for banks with a risk profile rating of 3, and 11-14% for banks with a risk profile rating of 4-5. Starting 1 January 2015: Minimum tier 1 capital at 6% and core tier-1 capital at 4.. Starting 1 January 2016: Banks will build up a capital conservation buffer progressively, starting with 0.62 of risk weighted assets on 1 January 2016, 1.2 from 1 January 2017, 1.87 from 1 January 2018, and 2. from 1 January Counter-cyclical buffer and capital surcharge may also be implemented depending on market conditions and systemic risks. OJK requires integrated corporate governance and risk management for all financial services institutions and its subsidiaries. OJK also requires a director to oversee the operations of the subsidiaries. The parent s board of directors is directly responsible for the subsidiaries operations and risk management Going forward, OJK will also regulate capital requirements for subsidiaries. Multifinance companies now can offer investments, working capital, multipurpose or other loans. It can finance infrastructure projects but equity needs to be at least Rp1tr. Minimum down payment of 2W and productive 4W is 2, and 2 for consumer 4W. Minimum CAR for multifinance companies is 1. They will also be subject to non-performing-financing metrics and provisioning requirements like banks. Minimum financing to assets ratio must be 4. Maximum gearing ratio is 10x or 5 of total capital. Foreign exchange debt must be fully hedged. Source: DBS Bank; DBS Vickers, Bank Indonesia Page 16

17 Indonesian Banks and Multifinance Companies Indonesian banks: Classification and examples Classification Definition Examples BUKU I Core capital below Rp1tr Bank Sulut, Bank Kalbar, Bank Saudara, BRI Agroniaga, Bank ICB Bumiputera BUKU II Core capital at between Rp1tr and Rp5tr Bank Mayapada, Bank DKI, Bank Jatim, Bank ICBC Indonesia, Bank ANZ Indonesia, Bank Mutiara BUKU III Core capital at between Rp5tr and Rp30tr Bank BTPN*, Bank Tabungan Negara*, PaninBank*, Bank Danamon, Bank Bukopin, Bank CIMB Niaga, Bank International Indonesia, Bank DBS Indonesia, Bank UOB Indonesia, Bank OCBC NISP, Bank Jabar Banten BUKU IV Core capital above Rp30tr Bank Central Asia*, Bank Rakyat Indonesia*, Bank Mandiri*, Bank Negara Indonesia* Foreign banks Foreign banks with a branch office in Indonesia HSBC, JP Morgan, Bank of Tokyo-Mitsubishi UFJ, Citibank, Deutsche Bank, Standard Chartered Bank *Banks within our coverage Source: DBS Bank; DBS Vickers, Bank Indonesia Page 17

18 Indonesian Banks and Multifinance Companies Stock Profiles Page 18