Above expectations. FY08 results were above consensus and our expectations, on better-than-expected operating expenses. Net and core profits were 119% and 120% of our forecasts, respectively.
Rapid cost recovery. BNI’s cost recovery was faster than we expected. The bank managed to slash its FY08 operating expenses by 5% yoy by streamlining its operations and organisation. Cost-to-income ratio rapidly dropped to 54% from 66% in FY07.
In-line provisioning. The bank booked Rp4.4tr of provisioning expenses, in line with our expectations. It wrote off Rp4.2tr of NPLs in the year, vs. Rp0.8tr in FY07, bringing down its NPL ratio to 5.0% from 8.5%. Coverage was maintained at 102%. Management explained that most of the write-offs were related to loans originated before 2004, and further write-offs in 2009 are possible. We have factored in Rp4.4tr of provisioning expenses in 2009, in anticipation.
Operating performance continued to improve. Loans grew 26% yoy, led by corporate loans, followed by the small and medium segments. Deposits grew slower, at 12% yoy, lifting the loan-deposit ratio to 69% from 61%. Low-cost deposit ratio was maintained at 58%.
Upgrade to Outperform from Neutral. We have adjusted our cost assumptions following BNI’s rapid improvement, raising our FY09-10 EPS estimates by 1-27%. We also introduce FY11 numbers. Our target price has been raised to Rp930 from Rp870, still using DDM with a discount rate of 16.4%. We upgrade the stock to Outperform as we expect it to perform better on the back of the better-thanexpected results. BNI has been performing in line with the market since our last downgrade to Neutral, but underperforming peers by 4-19%. Its valuation gap with Mandiri has widened. An improved risk appetite among investors should also widen their reach to stocks with higher risk profiles like BNI.
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