Indonesian banks are gearing up to issue dollar-denominated bonds as early as this quarter, and plans to access lower funding rates offshore will be met with enthusiastic investors seeking names that add diversification to their portfolios.
PT Bank Rakyat Indonesia said January 31 that it plans to issue up to US$1billion in global bonds in the first quarter, while PT Bank Mandiri, Indonesia’s largest bank, said it has earmarked a US$500-800 million bond issue in this year’s budget, according to various news reports.
“The costs are lower for issuing in foreign currency or dollar bonds, so that’s why they are going to that market,” according to a Singapore-based credit analyst, who added that it is not because of a need for foreign currency. “Last year, Bank Negara Indonesia (BNI) issued a US$500 million five-year senior unsecured bond and the coupon rate was 4.125%. But they can raise at a cheaper cost now.”
These plans come despite slowing foreign currency loan growth in the country since the start of last year, with the loan-to-deposit ratio falling to 87.1% in November 2012 from 93.5% a year earlier, according to a January 30 report by Moody’s. A weakening outlook in the mining and plantation industry is also lowering demand for dollars, as companies associated with these industries make up a majority of foreign currency demand.
But cheaper funding costs will allow Indonesia’s banks to match their asset and liability durations.
“They come to the market to raise bonds because the cost of raising a US dollar bond is lower now compared to before and also whenever you raise bonds, these are long-term liabilities that can be used to fund long-term assets (i.e. loans),” said Wee Siang Ng, an Indonesian banking analyst at Moody’s.
Foreign currency deposit durations are usually less than a year.
Indonesian bank credit spreads are trading tighter than India and the Philippines, as robust economic growth and steady loans growth has continued to groom investor interest for these credits. The fact that only two lenders have outstanding bonds in the secondary market has increased the lure for these names further.
State-owned Export-Import Bank of Indonesia and PT Bank Negara Indonesia (BNI) comprise of the country’s outstanding bank bonds in the secondary market. BNI’s US$500 million, senior unsecured bonds maturing in 2017 are trading at 104.5 and yield around 2.9%-3%. Meanwhile, Indonesia Exim Bank’s bonds due 2017 trade at 170 basis points over Treasuries. Credit analysts and investors described these levels as “tight,” but added that demand for more bank names in the primary market will be driven by expectations of economic and loan growth.
S&P forecasts that Indonesia’s gross domestic product will grow 6.3% this year and 6.5% in 2014, while inflation is expected to remain benign.
“You will see some activity [from this space] if Bank Rakyat comes in the first quarter, so you would expect to see more come the next month,” said another analyst. “If all goes well people will be focused on this now and expect another to follow suit. Funding costs are very cheap for them because everyone wants Indonesian banks now that they have better ratings and that makes it easier.”
The analyst added that PT Bank Danamon Indonesia also has a good track record, so that may also be a decent candidate to tap the market. The lender has issued dollar bonds in 1995 and 1996.
“The market can weather a few Indo bank deals, especially if they are between US$300-500 million and are not as large as other countries’ [bank bonds].”
Another senior debt syndicate banker said future Indonesia deals can see standardised five-year deals at volumes of US$500 million.
Moody’s rates the country’s nine largest banks’ long-term bank deposit rating at ‘Baa3’ with a stable outlook because of they will obtain strong support from either the government or the parent, said Ng. The banks include PT Bank Mandiri, PT Bank Rakyat Indonesia, PT Bank Central Asia, PT Bank Negara Indonesia, PT Bank CIMB Niaga, PT Bank Danamon Indonesia, PT Pan Indonesia Bank, PT Bank Permata, PT Bank Tabungan Negara. Standard & Poor’s rates Bank Mandiri and Bank Rakyat ‘BB+’ and Bank Negara Indonesia and Bank Danamon ‘BB’.
Bryan Collins, a portfolio manager at Fidelity Asset Management, said Indonesia-specific considerations to make when investing in their banks is the pace of loan growth and the categories of lenders, i.e. whether it is from commercial borrowers, retail or wholesale.
“Generally, if you are seeing strong and very rapid loan growth, you need to be mindful about asset quality and the risks to a deterioration of asset quality in the coming period, especially if you are expecting a soft patch in growth,” said Collins. “In Indonesia, because we’re seeing very strong domestic oriented growth and it’s still very much a developing economy, those are the things you want to be focusing on and ensuring you are being compensated for the risk.”
Moody’s said in its report that the country has witnessed strong credit growth of 23% annually since 2006, which is a concern that has been accompanied by improving corporate and household balance sheets. S&P said loan supervision and oversight was not stringent enough.
“In S&P’s view, banking regulation and supervision in Indonesia are weak,” said analyst Geeta Chugh. “We consider that certain aspects of the banking regulations, such as loan classifications and capital adequacy standard, have been more lenient than international standards.”