Banking Sector - Expecting solid results to continue

Indo banking sector’s key metrics remain strong, while our coverage’s 1Q23 results mostly beating ours and street expectations. We expect earnings to remain solid in the following quarters, aside from expectations on flat benchmark rates and peaked CoF in 1Q23. Stable loan growth and loan yield could overall underpinned NIM to remain within 1Q23 level, while continuing asset quality improvement should maintain earnings growth to arrive within forecasts. We maintain our Overweight stance, with BBRI and BBNI as top picks. Loan demand appetite remains Amidst lingering fears on potential headwind from US financial system health uncertainty, Indo banking sector loan growth in Mar ‘23 (+9.93% yoy) seems confirming that domestic loan growth remains resilient. The total outstanding credits of IDR6,446 tn, were driven mainly by investment loan demand appetite which still intact and grew by 11.4% yoy. Working capital loan recorded 9.5% yoy, while consumer spending has overall underpinned the consumer credit which grew 9.2% yoy. Expectations on solid credit growth in 2Q23 remain intact Mar ‘23 loan growth was arrived within BI and OJK ‘23F loan growth range expectation between 10%-12% (KBVS: 9% yoy). We might see solid loan demand to continue as the survey on demand and supply of bank financing (SBT) from Bank Indonesia as of Mar ’23 seems confirming that domestic banking loan demand likely to continue moving within the positive growth trajectory. The survey also revealed that loan disbursement growth in 2Q23 is expected to be stable, with SBT amounting 99.7% (2Q23) or higher vs 63.7% in 1Q23, while in ‘23F the total outstanding credit could reach 10.4% yoy higher. The slower loan growth by 100bps vs. ‘22’s 11.4% yoy seems tolerable due to the recovery momentum and low base effect from ‘21’s loan growth at 5.2%yoy. Expecting stronger confidence We expect the ongoing US financial system uncertainty will continue to be softened going forward and thus could help investor, debtors and creditors confidences to improve. Indonesia’s well capitalized position and strong Tier-1 capital seems more than enough to cushion any latent negative impact, aside from solid LDR which should be translated as ample liquidity room as well as big banks expectation to witness manageable and even softer credit cost in 2023. Latest data from Bank Indonesia also strengthening the robustness of domestic banking sector, whereas loans continue to take as the largest chunked of total asset and marketable securities only made up around 17.3% of the banks asset or less than a third to loans composition of 58.5% and improves around 82bps compared to Jan ‘22 of 18.1%. NPL remain well behave with lesser restructured loans Aside from its ample liquidity at IDR8,005 tn or grew by 7% yoy, NPL also become less riskier at 2.49% as asset quality improvement trend remain unbroken. Likewise, the amount of Covid-19 credit restructured which continue to decrease, dropped by IDR22.28 tn to IDR405.42 tn. Maintain our Overweight stance Following the 1Q23 result, we expect banks under our coverage to record another solid result. Should transmission on benchmark hikes to CoF remain needed in the following months, we view expectations on muted rate hikes coupled with ongoing solid loan demand as well as similar loan yield rates figure on qoq basis might overall cushioned NIM to fall into a contraction zone. Risks to our call: a) lower-than-expected loan growth, NIM, loan yield, b) credit cost spikes, c) higher inflation, slowing economic activity, rising bond yield d) deteriorating AQ and e) worsen global banking collapse.