Danareksa Bank Central Asia (BBCA IJ, Rp3,500, SELL) Overvalued, take profit

FY09-10E EPS increased slightly, but still a SELL
We raise our FY09-10 EPS estimates by 8-5% to account for higher interest income and higher other income booked in 1Q09. Our DDM derived TP edges up to Rp2,725, implying 2.5x-2.2x FY09-10E PBV and 10.8x-9.5x FY09-10E PER. Yes, the bank did show good performance in 1Q09, but that was attributable to higher lending rates while the COF softened– a carryover from 4Q08. Lending, however, was unimpressive – the bank’s loans actually contracted 5% on a QoQ basis. We expect BBCA to cut its lending rates in 2Q09, although loans growth is only expected to pick up in the second half of the year. The bank trades at a rich valuation of 3.3x FY09E PBV. There is better value elsewhere. Maintain SELL.

Lending has slackened; so where will the bank put its money?
NPLs were low at 1.6% in 1Q09 and bank lending is unlikely to be as aggressive as it was last year. Quality continues to be the bank’s main focus, in our view. Nevertheless, we stick with our 11% loans growth assumption this year despite the 5% QoQ contraction in loans in 1Q09. Lending should pick up once BBCA lowers its lending rates - most likely in 2H09 we believe. For now, though, we think BBCA will likely tilt its portfolio towards SBI and government bonds (together they currently account for 39% of total earnings assets). Note that with BBCA’s low COF of 3.6%, the bank will still be able to generate a high NIM of 6-7%. As for the NPLs, they are expected to remain in check and even decline to 1.3% by YE09 as loan restructuring is completed. This should encourage more lending in the future.

But the high NIM may come under pressure
BBCA doesn’t have much room to lower its deposit rates in our view. And, at the same time, the bank is likely to cut lending rates going forward. We therefore expect the NIM to ease to 6.5% by YE09. Higher operating expenses are also inevitable since BBCA plans to open another 100 branches (as compared to 35 branches last year) as part of its efforts to remain the country’s number one “transactional” bank. As a result, we expect the bank’s cost-to-income ratio to increase to 46% in 2009 from 42% last year.

Benefiting less than other banks from consumer recovery
We argue that BBCA benefits less than other banks from either declining interest rates or recovery of the consumer sector. This is because 75% of the bank’s deposits are already low cost deposits and 42% of its loans are channeled to the corporate segment. In fact, declining interest rates shall likely hurt its profitability given that 85% of its assets are variable in nature. As loans only account for 42% of its assets, there is little to buffer the bank from declining interest rates. While consumer lending shall pick up, the bank’s focus will likely remain on corporate and commercial lending given BBCA’s strategy of securing greater transactional value and therefore higher fee based income.