Banks

Might Not Be the Best Time but Should Not Be the Worst

• At > -3SD of its 5-year mean, we believe current valuations have priced in excessive risk premium and negative growth.
• Amid underperformance compared to peers, BBCA is the safest bet based on our analysis under current situation. 
• Despite lingering uncertainties, we upgraded our sector rating to Overweight, with BBCA as our top pick.

Excessive sell-off has outpaced fundamentals

Following 15-36% YTD share price drop, we believe Indo banks’ current valuations imply negative earnings growth for FY26F. Even assuming discounted cost of equity (of 1-3SD), we estimate the market is pricing in earnings contractions of -22.8% for BBRI, -14.9% for BBCA, -12.7% for BMRI and -11.1% for BBNI. This appears overly conservative when viewed against the sector's long-term earnings track record.

ROE Sensitivity: Margin Resilience and Asset Quality Risk

Based on our ROE sensitivity analysis, BBCA, BBRI, BTPS, and BNGA are relatively better positioned from a margin perspective, as their earning asset yields are more responsive than funding costs, resulting in positive spread expansion. In contrast, BMRI and BBTN are more dependent on cost discipline and fee-based income growth to drive ROE improvement given their limited margin spread sensitivity. On asset quality, BBTN is the most vulnerable to credit deterioration, with the highest ROE sensitivity to a 100bps increase in CoC, followed by the SOE banks due to their higher loan intensity and leverage. Meanwhile, private banks are generally more resilient, particularly BTPS, whose low leverage and already elevated CoC reduce the incremental impact of additional provisioning on ROE.

BBCA improving ROE amid stable leverage level

Analyzing the ROA and leverage trends, BBCA and BMRI stand out as the highest-quality franchises. BBCA achieves superior returns without leverage expansion, while BMRI has successfully converted higher leverage into higher shareholder returns without compromising asset quality. BBRI, BRIS, and BTN offer the highest sensitivity to an improving economy. Furthermore, we expect BBRI to benefit from potential CoC normalization, BRIS from continued scale efficiencies, and BTN from significant operating leverage if ROA improves even modestly.

Upgrade to Overweight with BBCA as our top pick for the sector

Despite persisting foreign flow and domestic economic risks, we upgrade our sector’s recommendation from Neutral to Overweight as we see the excessive share price drop as exceeding the bank’s fundamentals, in our view. Our top pick remains BBCA, followed by BTPS, as both names have strong ROA and lower leverage to cushion the potential impact of higher CoC. Downside risks to our view are significant deterioration in asset quality and higher-than-expected NIM compression.

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