Mandiri Sekuritas BBTN: Beneficiary of lower interest rates

BBTN recorded higher-than-expected net profit on the back of lower provisioning expenses in 4Q09. Still, we foresee brighter outlook for the bank this year, hence we maintain our buy recommendation on the counter. At the current price, the stock offers 13.2% potential upside.

NIM expanded due to lower cost of funds. BBTN is largely benefited from the agreement among large banks to cap the maximum TD rates at 8% in Aug09 (followed by 7% in Nov09). This led to a significantly lower cost of funds of 6.7% in 4Q09 compared with 8.2% in 3Q09. Consequently, the bank’s interest expenses dropped by 11.1% qoq in 4Q09, causing a 34% qoq increase in net interest income. NIM expanded to 4.7% for! FY09 (vs 4.3% in 9M09).

However, operating expenses increased. Operating expenses increased significantly by 13.8% qoq in 4Q09, bringing total operating expenses to Rp1.8tn for FY09 (+16.9% yoy). Management claimed such high operating expenses was due to investment and MESA (Management and Employee Stock Allocation). This made the bank’s cost-to-income ratio very high at 68.9% for FY09, only a slight decline from 69.3% for FY08.

Higher net profit due to lower provisioning expenses. The bank recorded provisioning expenses of Rp64bn in FY09, lower than our expectation of Rp120bn. Meanwhile, NPL was recorded at 3.4% at end Dec09 (vs 3.2% at end Dec08). Consequently, the coverage ratio was relatively low at 51.4% (vs 54.3% at end Dec08). Management claimed that this coverage ratio is adequate to cover possibility of loan losses given its historical high recovery rate o! n the for eclosed assets. As a result of lower provisioning expenses, net profit grew by 41.7% qoq to Rp171bn in 4Q09, bringing the full-year net profit to exceed our expectations.

Maintain a buy. Despite higher operating expenses last year, we foresee better outlook for the bank due to the following factors: (1) lower interest rate environment will enable BBTN to maintain a sound margin. We project NIM to reach 5.1% this year (2) the bank’s serious efforts to grow its low cost funding through the opening of many kiosks (67 kiosks until now) and (3) the rolling out of pilot project on loan origination system and loan collection & recovery system will improve efficiency and risk manage! ment with in the organization. We expect the bank to book a net profit of Rp742bn this year (+51.3%yoy), translating into ROAE of 13.2%. Maintain buy.