CLSA BNI earnings review

Bank Negara Indonesia reported headline earnings of Rp1.0tn (Rp67 per share) in 1Q10, an increase of 60% YoY. This is a very impressive number prior to any adjustments. The headline number reflects 30% of consensus estimates. ROA and ROE were reported at 2.5% and 25.4% respectively.

Financial results will be released this morning, only the presentation occurred yesterday.

The better than anticipated earnings were driven by non interest income of Rp1.8tn. Nearly 700bn of this is attributed to a reversal on the allowance for loan losses, a non recurring revenue stream. The reversal reflects improving credit trends, which we viewed as a positive development.

If we back out the reversal from the allowance for loan losses, bottom line figures declined YoY, as the lower provision does not offset higher expenses.

Noninterest expenses increased by 31% YoY. The bank announced a strategic plan going forward to improve productivity and revenues per employee. BNI is rationalizing 1,000 positions (@5% of the workforce) and will hire 600 new employees, primarily executives with that can help with the cultural transition the board is attempting to employ. They are working to employ a more incentive based pay scheme for employees, but it appears that could be a few years away.

Coverage ratio continues to rise and currently is at 121.8% a YoY increase of 1600bps. NPL's improved to 4.6% from 4.7% in 4Q09. Credit is improving, primarily as the bank is increasing its NCO’s.

The CAR decreased by 40bps to 13.3% QoQ. However, with the implementation of operational risk (the first 5%) impacted the CAR further. Including operational risk the CAR is 13.1%. This will continue to drag CAR lower as it is employed throughout the next 15 months. Operational Risk implementation schedule: 5% in 1H10, 10% in 2H10 and the full 15% in 1H11.

We expect further reversals to boost fee income throughout the year if the bank continues to see improvements in credit (as expected). The reported numbers represent impressive results when including the non-recurring figures.