AAA Company Update_BBRI

Last week, BRI reported increasing net income by 22.66%, outpaced our and consensus estimates by 15.6% and 7.16% respectively. Higher fees and other operating income, lower than expected provision and higher non-operating income became the main reasons for higher bottom line. On the other hand, its loan book grew 27.61% YoY, outpaced industry growth by 10.12%. However, its net interest margin is squeezed to 9.14% from 10.18% one year before. Higher cost of funds, and assets yield stickiness are blamed as the main reason for declining profitability indicator.

Better than expected asset quality.
BRI booked 3.52% in 4Q09, slightly decline from 3.92% in 3Q09 because of better economic environment and Rp. 1.733 trillion wrote off in 4Q09. In overall, Bank Rakyat NPLs are still higher by 2.5% in term of absolute amount in 4Q09. Higher NPLs on its medium loan segment by 12.31% is responsible for the problem. The management said that weaker economic condition in 2009 and weaker control to regional office are the main reason for NPLs blow up. So, in 2010 the management will start to write off the loans as well as bring the responsibility of the loan up to head office. We believe that the problem won’t be solved in the near future since the migration from regional to head office takes time. Then, the head office officers have to indentify the problem from the beginning. However, we are still confident that BRI’s NPL ratio will decline to around 3% in the end of 2010, because of better economic condition and aggressive loan growth.

Higher cost fund in the lower interest rate environment.
Unlike other banks which have already experienced declining interest rate, BRI still faced higher cost of fund in 4Q09 by 6.02%. The management said that its higher proportion on institutional depositor which locked its time deposit for 1 year make them booked higher cost of fund compare to other banks. The management explained that all higher rate time deposit has been matured in 1Q10. So, they aim for lower cost of funds in FY09, means higher NIM since their loan yield is sticky enough to face low interest rate environment. So, we believe that BRI will be able to increase their profitability in 2010.

Conservative loan growth target
Going to 2010, the management indicated loan growth target by 20-25% or below last year achievement. The management conservatism is opposed with our stand, which place BRI as one of the biggest beneficiary for higher micro and consumer loan growth. We are sure that micro and consumer loan will grow faster than SME, commercial and corporate loan do, since there is a lot of room to grow and less tighter competition.

Maintain HOLD (TP-Rp.9000,-)
Although BRI booked impressive bottom line, and bright future for micro and consumer loan, we still maintain our recommendation on HOLD (TP-Rp.9000) since the share price has been increased near to its intrinsic value. Unsolvable non performing medium loan as well as decreasing BRI profitability is strengthens our thesis on BRI. However, we are still suggesting for long term investor to BUY the stock with better entry point.