Time to Buy Bank Stocks
Category: Column By : Teguh Hidayat Read : 297 Date : Thursday, May 04, 2017 - 10:31:58

Every time I meet international investors interested in investing into the Indonesian stock market, I virtually always recommend banking stocks, especially the big ones such as Bank Mandiri, BRI, BCA or BNI. For most investors from U.S. or other developed countries, to invest in a developing country such as Indonesia has risks. Therefore, they will prefer to buy stocks with the lowest possible risk, where the company could operate normally without any serious obstacles for years or even decades, no matter the macroeconomics or local politics (except, of course, in the most extreme crisis, such as in 1998 or 2008). So the stock, although it may fluctuate short-term, long-term will produce decent gains along with the real growth of the company itself.

Based on experience, in Indonesia, there are only two sectors with these characteristics: consumer goods and banking. You can check for yourself: In addition to banking stocks as mentioned above, stocks of consumer goods firms such as Unilever Indonesia, HM Sampoerna, Indofood CBP, and others. Almost all of them have seen substantial gains in the last five years or even longer, not including dividends. Unfortunately, consumer stocks’ valuations are usually expensive, and some companies are already mature, so they don’t offer further growth in terms of their net asset value, as they spend 100% of their annual net income to pay dividends.

So banking stocks may be a better choice. Interestingly, in contrast to the consumer goods stocks, which often stagnant without notable fluctuations for months, banking stocks have been more volatile, although they still will gain in the long-term. When Indonesia slowed down in 2015, the banks, especially the big ones, still did well, growing their net income, paying dividends of 30% or more, and keeping their return on equity stable. BNI did see its net income decrease, but only because it was being cautious by provisioning for possible higher NPLs—which never actually happened.

Nevertheless, the 12% decline in Jakarta Composite Index (JCI) in 2015 meant shares fell across the board, including bank stocks. In 2016, the JCI recovered, gaining 15% for the year, but bank shares rose far lower overall. BRI, for example, only rose 2%, even though its net income rose 3%.

The stagnation of bank stocks in 2016 was because this sector got hit with negative sentiments during the year. In February 2016, the government issued a statement that the net interest margin of banks would be restricted from 7% to around 4%, which investors misinterpreted as a decline in the banks’ net profit. In June 2016, Bank Indonesia (BI) changed the calculation of the BI Rate to the seven-day BI Rate, confusing investors, who dumped bank stocks. Lastly, in December 2016, during the government’s tax amnesty program, any repatriated funds had to be put into domestic banks, thus inflating the value of third party funds in BCA. Therefore, BCA would have to raise capital, to shore up its capital adequacy ratio.

Because of the episodes, bank stocks barely moved in 2016, not going up or down much. Here is the opportunity: even as bank stocks stagnated, their book value grew significantly in 2016. That’s right—their valuations are now become much cheaper than usual. When this article was written, BRI’s stock was at Rp 13,150, reflecting a PBV of 2.2 times, which for second largest bank in Indonesia (in total asset value, after Bank Mandiri), is well below its historic average of 3.0. BRI boasts consistent long-term performance, with an ROE of about 25% every year—so we can say the valuation is too low.

Based on experience, the cheaper valuation means that the profit will be higher. In 2011, bank stocks also stagnated, after the JCI rose 3% for the year, whereas their fundamental performance was good. As a result in 2012, when the JCI rose 13%, many bank stocks, such as Bank Mandiri, rose much higher, at least 40% for the year.

So unless there is a major crisis this year (unlikely), bank stocks are likely this year to have an extraordinary rise, as they did in 2012. So far, international fund managers have spent the most cash on bank stocks, thus BRI and others have gone up more than 10% since January. But, given their still low valuations, they could still go higher. If you are looking for big caps stocks with low risk and plenty of liquidity, but still offer high potential gain, then this is your best opportunity. Take it now or never!