Mandiri Sekuritas BBNI: Banking on better loan quality

Our latest talk with the CFO of the bank affirmed the bank is on the right path toward brighter performance in the future. Improved loan underwriting processes and consistent efforts to clean up its bad debts are expected to bring down its NPL’s in the future. This will lead to lower provisioning expenses, thus higher earnings going forward. We therefore upgraded our net profit forecast for the bank for 2010 and 2011 as well as our TP to Rp2,900/share. Maintain buy.

Minimal additional NPL expected going forward.., Global financial crisis and slower economic growth in 2009 have negatively affected the loan quality of BBNI during the year. Excluding writeoff, gross NPL increased by Rp3.5tn in 2009 (vs additional loans of Rp8.8tn). We expect better loan quality going forward banking on brighter economic outlook for 2010 and 2011 as well as the management’s serious efforts to improve the quality of loan underwriting processes.

,… and further improvement in coverage ratio. Meanwhile, the bank’s coverage ratio has improved significantly, indicating the implementation of a more conservative policy. Exhibit 1 highlighted that the provisioning coverage per category of loans which continously increased for the past three years. We expect such trend to continue, reaching coverage ! ratio of 141% in 2010F and 146% in 2011F, respectively.

Forecast upgraded. We adjusted our forecast for BBNI on brighter outlook. Despite the projected lower net interest income due to lower margin generated from its corporate loans, we still upgraded our net profit on the back of lower provisioning expenses.

Maintain a buy. As a result of such upgrade, we increased our TP to Rp2,900/share, translating into 2010F P/BV of 2.1x and PER of 12.6x. At our TP, BBNI still trades below its peers (including PNBN which is currently trading at 2010F P/BV of 2.2x and PER of 18.5x. Please note that PNBN has much lower coverage ratio of 71.2% and higher NPL of 4.8% at end Sep09). Meanwhile, there is a market talk that the current President D! irector o f the bank will move to BBRI. We have no worries on this rumor as we also heard that the replacement will likely come from one of the BOC and BOD team. Maintain buy.