Banks
Beware of catching the falling knives
- Bank valuations have derated, but PBV valuations have yet to hit bottom in the past two downcycles, i.e., 2015-2016 and 2019-2020.
- We see banks continuing to face asset quality risk and tight liquidity, with persistent foreign outflows and local fund position still elevated.
- Maintain Neutral rating on the sector with BBCA as our top pick, followed by BTPS and BRIS given their better CoF and NPL outlooks.
Valuation downside might still prevail
Following FY24 earnings results from several banks in January, the banking sector's share price fell by 7% MTD (vs. JCI’s -6%), led by BMRI (-17%) and BBNI (-13%). However, we believe banks are not out of the woods yet as the sector is currently trading at 2.1x PBV, -0.5SD of its 15-year average, still above the lows seen in previous cycles, i.e., 1.5x PBV (-2.5SD) in 2015-2016 and 1.4x PBV (-3SD) in 2019-2020.
Big banks’ valuation has depressed but yet to reach its historical bottom
The big banks have not yet reached their valuation bottoms in the last two downcycles, partly driven by the NPL upcycle (2015-2016 and 2019-2020). Only BBRI has seen its valuation return to 2015-2016 levels, where it declined by 44% (vs. current 43%). While asset quality concerns are not as pronounced as during the COVID-19 pandemic, it is worth noting that the current situation is still plagued by tight liquidity, contrary to previous cycles, which saw loosening liquidity trends, as reflected in big banks' CoF. As such, we think that there is still downside risk to valuation, which could fall below -1SD of its 15-year historical average.
As noted in our previous report, we see risks from persistently tight liquidity and asset quality. These risks could lead to compressed NIM and higher credit costs for FY25F, which we believe have yet to be fully priced in.
Foreign outflow dragged valuation, banks are still in overweight position
BBCA has experienced the largest foreign outflows YTD 2025, offsetting inflows from the past two years. BMRI and BBNI have also seen continued outflows since FY24. By end of Jan25, most big banks, aside from BBRI, had relatively high foreign mutual fund positions, suggesting selling pressure may continue. BBCA and BBRI are the only banks where local fund positions are neutral relative to their respective weightings.
Maintain Neutral, with BBCA remaining as our top pick
Despite outperforming peers, we continue to favor BBCA, BTPS, and BRIS due to their resilient CoF and stronger asset quality outlooks. We expect AGMs and 1Q25 results in Mar-Apr25 to remain overhang in the short term, in addition to global macro uncertainties. Key risks to our view include a stronger-than-expected Rupiah, liquidity, and asset quality.
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