TP upped to Rp2,300, implying 2.1x FY09 PBV
The stock is cheap, trading at a 26-46% discount to its regional and local peers. Its operations have been turned around and the bank has made greater cost efficiencies. In time, this should lead to lower provisions and sustainable loans growth post the balance sheet clean-up. Our TP, which is based on a blended valuation of P/E multiples and DDM, implies 2.1-1.9x FY09-10E PBV and 16.1x-11.6x FY09-10E PER. While our FY09E EPS estimate is unchanged, BBNI’s robust loans growth will likely lead to slightly higher provisioning next year, yet significantly lower than 2009’s. This and a higher tax rate reduce our FY10E EPS estimate by 17%. All in all, we expect EPS to grow 43% 3-yr CAGR on 17% loans growth while efficiencies will keep costs down to 50-52% of income.
Loans poised for growth
With the bank still in a consolidation phase, the new management is focusing on assets quality. This strategy has worked so far and NPLs have come down dramatically from 8.5% to 5.0% in just a year. Cleaning up bad debts shall remain a priority, we believe. Loans written-off reached Rp4.2trn last year but we are confident the amount will be much lower this year. Although plans to lend to PLN may not materialize, loans should still grow a respectable 10% in 2009, or above the management’s guideline of 6-7%. Crucially, its low LDR of 68% means there is plenty of potential for further lending. Corporate and consumer lending shall remain the focus - the former mostly focused on SOEs with good credit ratings. Admittedly, margins on corporate lending are low, but strong growth in consumer lending should help push up the bank’s overall NIM to at least 6.1%. NPLs, meanwhile, are expected to rise to 5.5% by end-2009 but remain under control. As for 2010E, we expect loans to grow a brisk 20% as the economy picks up. Provisioning is expected to be capped at Rp3.0trn in 2010, or less than the estimated Rp3.8trn in 2009. NPLs are expected to ease to 5.2% from 2009E’s 5.5%.
The loan restructuring continues
The bank has given more responsibility to individual branches, allowing them to set pricing for loans. The effect has been dramatic and the cost-to-income ratio (CIR) has come down from a peak of 66% in 2007 to only 40% in 1Q09. While we do not expect opex to fall further – especially since the bank will be focused on expansion – higher productivity is expected to lead to an 11% increase in pre-provisioning operating profit (PPOP) over the next 3 years. For FY09, we assume that the CIR will stay at 52% since the company shall likely book early pension costs. Loans restructuring, however, shall take center stage this year, and the bank aims for recovery of around Rp900bn-1trn. Any recovery will be credited to provisioning and therefore, the bank’s coverage will remain above 100%. Restructuring aside, we expect the bank to adopt better lending practices. This should mean lower provisioning in the future.
Sufficient FY09 CAR at 10% loans growth
Our FY09E estimated CAR of 13.7% assumes 10% loans growth. Even if we assume aggressive loans growth next year and a 50% dividend payout, the CAR still reaches 12.5%. While this is higher than BI’s minimum requirement, we believe that an issuance of sub-debt would be inevitable in order to sustain the loans growth long-term. Under our stress test, the CAR would stay above 12% assuming an additional 5% NPLs with coverage of 120% (in the extreme case) and 100% (in the normal case). Should BBNI plan to increase its CAR to 15%, the bank’s loans would have to grow a negative 5-8% or the bank would have to issue sub-debts of around Rp2.6-3.3trn. For now, we do not assume any issuance of sub-debt or capital loans.
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