CLSA BBRI downgrade to OPF

Research Today: Bank Rakyat downgrade to OPF

Finally, Nicolaos Oentung downgrades his favorite bank: Bank Rakyat Indonesia (BBRI IJ) from BUY to OPF. TP is unchanged at Rp4,500. BBRI share price has done well, up 27% since Nov 08 low vs. single digit gains for the average Asian banks.
However, we still expect BBRI to remain highly profitable supported by its strong micro franchise and conservative provisioning policies. At 2.0x 09CL PBV with 25% ROE, BBRI appears well-priced in our view.

Two major points from the report:

(1) Nico argues that BBRI could face its first balance sheet stress test post Asian financial crisis due to:
Rapid loan expansion: more aggressive than peers such as BBCA and BMRI in the past 2 years, and total amount disbursed from 2007-08 was more than BBRI’s total combined for the previous 7 years.
Severity of current economic slowdown. CLSA economics team just lowered Indo’d GDP growth in 09 from 2% to less than 1%.

The medium and corporate loans contributed the largest portion (32%) of new loans disbursed in 07 and 08. NPL for medium and corporate can be considered spotty with average NPL of 10.1% and 14.7% respectively. Understood that there is some legacy issue, but this portfolio carries higher risks, esp when the weather is bad.

(2) Capital shortage to constrain growth. CAR currently stood at 13.5% and assuming loan growth of 20-25%, we estimate CAR to decline by 150-200bps by end of 2009. Add operational risk charge, CAR will be reduced by another 300-350bps, so BBRI’s CAR will fall to almost BI’s min requirement of 8% by 2010.

BBRI plans to raise US$300mn sub debt in 2H09 to boost capital. Not going to be easy unless market condition improves. This is evident by Bank Permata’s (BNLI IJ) effort to raise US$200mn sub debt: they need to get Astra and Stanchart as standby buyer.