TP upped to Rp2,800
Post meeting the management, we slightly lower our FY10 loans growth estimate to 15%, to align with the company’s conservative guidance. The impact of this adjustment is mostly offset by BBNI’s lower cost of funds, however, as deposits growth will likely slow amid easing liquidity problems. At the same time, we also apply higher provisioning charges at about 2.5% of average gross loans, however, offset by a lower tax rate – meaning little change to our FY10E EPS estimate. Our higher DDM-derived TP of Rp2,800 assumes a higher 3-year loans growth estimate of 19% (which could be even higher if the planned rights issue goes ahead) and a sustainable NIM of around 6%. It also implies 2.1-1.9x FY10-11E PBV - a chunky 35% discount to the sector. While the planned rights issue may be a short-term overhang, completion of this corporate action will actually boost FY10-11E earnings by 4-17%, in our estimates. With such an attractive valuation and the turnaround story firmly in place, we retain our BUY call on the stock.
The planned rights issue can benefit the bank
The rights issue - if approved - should be a positive for the bank., given that it will help bring about brisker loans growth without the bank having to take on new debts (saving on debt servicing costs). How will the rights issue be structured? We can think of three possibilities. Firstly, the government may divest a 16% stake – an option that would raise Rp4.5-5.5trn for the government but not benefit the company (except for 5% additional tax benefits). Alternatively, BBNI could issue new shares, diluting the government’s stake to 60%. This would support loans expansion but at the expense of higher FY10 EPS dilution. The size of the issue is also unrealistically large in this case meaning that attaining approval from the government would likely be difficult. The third option is a combination of the two, with the government divesting around 3.1% of its shares and BBNI issuing around 18% new shares. In this case, FY10-11 EPS dilution would be minimized to 15-6% respectively and both the government and the bank would receive fresh funds. This would secure BBNI’s expansion plans and boost the bank’s capital – making this option the most logical choice in our view.
Implications of the third option
The government’s stake will be diluted, yes, but the gains in the mid-to-long term will far outweigh the losses in our opinion. Completion of the rights issue would add Rp98-120bn of interest income this year and potentially boost the NIM by an additional 6 bps, assuming that the rights issue is completed by 4Q10 and that the proceeds of Rp6.0-7.4trn are placed in SBIs. By next year, loans growth could exceed 22% and an extra Rp338-414bn of interest income could be obtained if BBNI were to switch its proceeds placed in SBI into higher yielding loans. Another positive is the additional 5% tax benefit with the bank aiming at 40% free-float. Also, the CAR would be boosted to 17% in 2010. As for EPS dilution, it would be minimal at only 6-7% next year. The ROAE would slip to 14%, but quickly recover to above 15% after one year.
Implications of the other two options
The government could theoretically just divest a 16% stake in BBNI. However, this would provide no operational benefits for the company. In this case, parliamentary approval may be easier to attain and our FY10-11E EPS estimates would need to be raised 2-7% on tax benefits, but BBNI’s FY10E CAR would remain low at 13% and loan expansion would be modest. Help could possibly come from a sub-debt issuance, although the cost of the debt would be fairly high. Alternatively, BBNI may issue new shares to dilute the government’s stake – with proceeds estimated to reach around Rp7.5-9.0trn. Although this would support loans growth, both EPS dilution and ROE dilution are huge – not in the best interests of the minority shareholders, we believe, although CAR would be boosted to 18-19% in 2010. Simply put, these two alternatives are less desirable, in our view.
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