Banks

Potential Higher CoC and Earnings Risks on SOE Banks from Govt’s Kopdes Merah Putih Initiative

 

  • While unlikely a game changer, the potential involvement of SOE banks in the Kopdes Merah Putih initiative could add earnings downside risks.
  • The worst-case scenario may see SOE banks’ CoC rise by 49-82bps in addition to higher liquidity risk.
  • Maintain Neutral rating on the sector with BBCA as our top pick, followed by BTPS and BRIS given their better liquidity and NPL outlooks

 

New initiatives on Indonesia cooperative

The planned formation of "Koperasi Desa Merah Putih" aims to establish economic hubs across 70-80k villages using existing village funds. The plan includes building warehouses and six retail outlets in each village to store and sell agricultural products. The budget is Rp3-5bn per village, with funding sourced from the village fund allocation, which is Rp1bn annually, accumulating to Rp5bn over five years. According to the Coordinating Minister for Food Affairs, the plan requires some SOE banks to provide initial loans as upfront capital, to be repaid over 3-5 years.

 

Current cooperative loans associated with a higher delinquency risk

According to Pefindo, loans to cooperatives have an NPL ratio of 8.5%. The ratio is higher compared to the banking sector’s NPL ratio across business sectors, which indicates that there is a higher risk in the cooperative segment. Based on the Ministry of Cooperative, Micro, Small, and Medium Enterprise data, Indonesia has around 130 thousand cooperatives, with a total of Rp275tr in assets and Rp197tr in turnover in FY23. Banks only contribute around 10% of the cooperative’s external capital, showing their small exposure to the cooperative segment currently.

 

Worst-case scenarios put the banks at higher credit and liqudity risks

If SOE banks equally disburse Rp3-5bn per village in one go and the cooperative loan’s NPL ratio is maintained at 8.5%, this could lead to a 49-82bps increase in CoC and an 11-56% reduction in earnings. However, given BBRI’s largest exposure to KUR (17% of its total loans) and KUR’s largest exposure to village credit facilities (with 80% of villages having KUR exposure), BBRI is likely to bear a larger share of disbursements compared to its SOE peers. Additionally, if SOE banks have to fund the credit themselves, they may also face liquidity risks, requiring them to secure c.5-9% of their current deposits.

 

Maintain Neutral, with BBCA remaining as our top pick

Although we do not expect this new program to materialize in the short term, we continue to favor BBCA and BTPS, as they have fewer concerns from this new program. Among SOE banks, we believe BRIS will be the least affected due to its business model. We maintain a Neutral rating as we continue to see high domestic and global macro uncertainties. Key risks to our view include a stronger Rupiah, liquidity, and asset quality.

 

 

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