Danareksa Bank Rakyat Indonesia (BBRI IJ, Rp5,800 BUY) Gathering pace

TP raised to Rp8,200
We raise our FY10-11E EPS estimates by 9-19% on a brisker loans growth assumption. This upgrade reflects our increasingly bullish view on the prospects for the economy with interest rates at all-time lows and inflation being benign. Yet despite the robust loans growth, the bank’s CAR shall remain above 13% in FY10E, supported by an expected Rp2-3trn sub-debt issuance. Accordingly, we raise our TP to Rp8,200 from Rp6,300 previously, assuming a cost of equity of 16% compared to 20% previously. Our new TP implies 4.0-3.4x FY09-10E PBV, admittedly at the high end of its historical trading range yet fully justified in our opinion considering the bank’s robust loans growth, strong NIM, high ROE and exposure to consumer recovery.

Brisker loans growth expected
Our 5-6% upward adjustment to the bank’s FY10-11E loans growth takes into account a number of bullish factors. First of all, interest rates are at an all-time low of 7%. Moreover, they may even head lower since the benign inflation has given BI more room to loosen monetary policy further. Another positive is the 4-6% consumption growth expected over the next two years helped by a Rp40trn tax stimulus (note that private consumption is already in good shape, growing a brisk 5.8% in 1Q09). Lastly, BBRI has plans to issue sub-debt in 2H09. This should help keep its capital at a healthy level, we believe. The amount to be raised is likely to be in the range of Rp2-3trn, bearing an indicative cost of 12% p.a. and with a maturity of 10 years. This debt issuance will keep the bank’s CAR above 13% in FY10E (even with loan growth in excess of 20% p.a.). Despite the additional sub-debt, BBRI will still keep its NIM above 9.5% and its COF below 4% in FY10-11E, in our estimates.

Good 2Q09 profits
April’s loans grew Rp5-6trn from Rp165trn in March, or among the highest in the sector. Seasonality is certainly one factor, in our view. It is interesting to see that BBRI’s lending rate has not changed much (at 15-17%) despite the rate cuts of 250bps since early this year. This is because lending rates for micro and small commercial loans (together accounting for more than 50% of the bank’s total loans) tend to be sticky at around 20-25%. In addition, the bank has also maintained high lending rates in order to offset the higher COF of 5% vs. 4% normally. By offering attractive deposit rates, the bank can maintain the amount of deposits. Against this backdrop, we believe the bank’s NIM should be stable at 9.5% in 2009. Note that the bank’s 1H09 results will probably be released in August because of its plans to issue bonds.

NPLs are under control
April’s NPLs are pretty much unchanged from their level in March of 3.24%, according to the management, but a slight increase by the end of 2Q09 is inevitable, we believe. Loans to the micro segment, in particular KUR (loans channeled to non-bankable clients), and medium business, are likely to account for the bulk of new NPLs. We forecast NPLs of around 3.6% by the end of 2Q09. NPLs shall peak in 3Q09, with loans starting to pick up in 2Q09. But with the loan restructuring continuing apace, we stick with our forecast of 3.3% NPLs by YE09. The provisioning booked will increase by at least 20% in 2Q09, assuming an expected 10% QoQ increase in 2Q09 loans growth. This is 27% of our FY09 forecast. But since BBRI will only start to lend aggressively in the second half of the year, we expect provisions for bad debts to peak in 3Q09.