Jakarta. Indonesian bank stocks have fallen to valuations comparable with or below their levels during the Covid-19 pandemic, as a potential downgrade of the country's stock market classification by global index provider MSCI triggered a sharp selloff, according to analysts at BRI Danareksa Sekuritas (BRIDS).

The Jakarta Composite Index (JCI) plunged 11.6% to 5,185 on Friday, its lowest close in six years, after MSCI opened a consultation on a proposal to reclassify Indonesia from an emerging market to a standalone market. The index triggered a trading halt at the opening of Friday's session.

The selloff hit major lenders particularly hard, with Bank Central Asia (BBCA), Bank Rakyat Indonesia (BBRI) and Bank Mandiri (BMRI) each falling to the exchange's 15% daily downside limit. Bank Negara Indonesia (BBNI) dropped 13%.

In a research note, BRI Danareksa Sekuritas analysts Victor Stefano and Nataniella Eva Kezia said the market reaction reflected concerns over foreign capital flows and index accessibility rather than a deterioration in banks' underlying earnings or asset quality.

MSCI's consultation remains open for feedback until April 30, 2027, with a final decision expected by June 30, 2027. The analysts expect uncertainty surrounding the proposal to weigh on bank stocks through the first half of next year.

Valuations Fall Below Pandemic Levels
The latest selloff has pushed the price-to-book value (PBV) multiples of several major lenders to levels that compare unfavorably with their valuations during the pandemic-era market crash.

BBCA's peak-to-trough PBV contraction in the current cycle has reached 61%, exceeding the 37% decline recorded during the Covid-19 downturn. BBRI's contraction has reached 62%, compared with 59% during the pandemic, while BMRI has declined 58%, against 54% previously.

Based on projected 2026 earnings, BBCA trades at 2.1 times book value, compared with its pandemic low of 2.9 times. BBRI trades at 1.2 times, against 1.1 times during the pandemic, while BMRI stands at 1.0 times, compared with 0.9 times. BBNI is valued at 0.6 times book value, against its previous low of 0.5 times.

Despite the sharp repricing, the analysts said banks continued to offer earnings and profitability metrics that did not reflect a comparable deterioration in their operating performance.

The lenders trade at 5.3 to 10.5 times forecast 2026 earnings, with projected returns on equity of 11.8% to 20.8% and dividend yields of 6.8% to 13.1%.

However, depressed valuations may not immediately translate into a recovery, as foreign investors could continue selling if Indonesia's market classification changes.

Foreign Selling Remains a Risk
Foreign ownership in Indonesia's four largest listed banks has declined from historical levels, but international investors still hold substantial stakes, leaving the stocks vulnerable to further outflows.

Foreign ownership stands at 69% in BBCA, 55% in BBRI, 55% in BMRI and 53% in BBNI, according to the research note. During the Covid-19 period, the respective figures were 78%, 74%, 64% and 46%.

"If MSCI proceeds with the proposed reclassification, funds benchmarked against emerging-market indexes could be forced to sell Indonesian equities to reflect the country's removal from those benchmarks," BRIDS said in its note.

The analysts cautioned that the remaining foreign ownership in major lenders leaves room for additional selling before investor positions are fully adjusted.

The potential shift in index classification therefore creates a market-flow risk that could persist even as valuations become increasingly attractive.

BTPS Emerges as the Preferred Defensive Pick
BRI Danareksa Sekuritas maintained an Overweight rating on the banking sector, citing depressed valuations, but identified Bank BTPN Syariah (BTPS) as its preferred stock amid the uncertainty.

BTPS trades at five times projected 2026 earnings and 0.6 times book value, with a forecast return on equity of 13.2% and a dividend yield of 12%.

The analysts highlighted the lender's leverage ratio of 2.3 times, the lowest among banks covered in their research, compared with 5.8 to 14.6 times for peers. Its lower leverage could help limit the impact of rising credit costs on profitability.

BTPS also has significantly lower foreign ownership, at 15%, compared with 53% to 69% for the four major banks. That makes it less exposed to forced selling by emerging-market funds if Indonesia loses its current classification.

The bank has also approved a Rp 1 trillion share buyback, which could provide additional support for its stock if fully executed, the analysts said.

The recommendation nevertheless carries risks, including a significant deterioration in asset quality and higher-than-expected benchmark interest rates and inflation.

Add as a preferred source on Google +