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IP BANK: Restructuring is Imperative but at The Expense of New Disbursement
Monday, April 06, 2020       10:14 WIB

 Sector Update   /   Bank  /   Click here for full PDF version 
 Author(s): Jovent Muliadi,Anthony  
  • Recently OJK allowed banks to do one pillar loan restructuring similar inn 2015-16 with emphasis on corona affected sectors and MSME .
  • Restructuring is imperative to ensure supply side recovery but with then risks of liquidity in the short term and moral hazard in the medium term.
  • CoF impact is around 22-37bp ( is the highest at 48-80bp) all elsen being equal, this can be offset with lower disbursement.

Similar restructuring relaxation back in 2015-16
Last week, President Jokowi stated that MSME debtors and online taxi drivers are allowed to delay its principal and/or interest payment for one year. Accordingly, OJK has allowed banks to restructure its loan portfolio affected by coronavirus (including loan below Rp10bn - MSME loan) using only one pillar instead of three pillars similar in 2015-16 for up to one year. Government and regulators have also instructed banks to lower its lending rate; all of these are imperatives to ensure the supply side recovery.
Delay in principal shall result in biggest delta positive for cash flow
The restructuring can be in a form of (or any combination): lengthening the tenor, lowering the interest rate, delaying principal and/or interest. Given the severity of the coronavirus outbreak towards the economy (work from home, social distancing policy, etc.) we think most shall opt on delaying the principal payment - biggest impact to cash flow. Our analysis suggest that delay in principal may result in 90% better cash flow for debtors as opposed to lower interest (+5%) or lengthening the tenor (+38%).
Positives are lower NPL and provision; negatives are potentially higher CoF and moral hazard issue
The restructuring may allow banks to delay the downgrade (NPL recognition) and thus provision booking. At the same time, delay in principal payment for MSME may impact banks' liquidity especially for BRI (as micro and small loans are being amortized similar like mortgage) to as much as 15% of its deposits, all else being equal. We estimate CoF impact to be around 48-80bp for BRI while 10-18bp for the rest of big 4, though banks can mitigate the CoF impact by lowering the new loan disbursement. Moral hazard can be an issue in the medium term as it will be hard to ensure millions of borrowers to repay back its instalment accordingly (principal and interest which can be 90% higher compared to interest only).
and remains as our picks
YTD, big 4 banks dropped 29% and now trading at adjusted 1.8x P/B (below its -1STD 10Y mean of 2x P/B). Our picks are (less earnings risk and probability of national service) and (attractive risk-reward preposition).


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