Deutsche Bank Tabungan Negara - Leader in home financing; initiate with Buy, TP Rp1,700

Our top pick for small-cap banks; Buy with TP of Rp1,700
We initiate coverage on BTN, Indonesia’s largest mortgage lender with 25% market share, with a Buy rating and a TP of Rp1,700. We believe BTN will be one of the primary beneficiaries of rising home ownership as per capita income is projected to double again in 5 years to around US$5,000. Rising property prices reduce NPL risks while asset recoveries have outpaced loan write-offs in the past four years. Funding is a risk given BTN's high LDR over 100%, but it is looking for asset securitization and distribution channel expansion.

Rising income levels support higher home ownership
BTN is a primary beneficiary of expanding home ownership (from 50%) on rising incomes. Indeed, GDP per capita is expected to double in five years to US$5,000. Also, the government’s plan to develop 1,000 housing towers for the low-tomiddle income segment with average pricing of US$20,000 bodes well for BTN’s target market. Low consumer debt to GDP of 8% implies ability to borrow.

Earnings to double within two years
We have projected a two-year earnings CAGR of 44%. ROAE is expected to rise to 12.4% in 2010F and 16.4% in 2011F from a low of 11.5% in 2009 (post capitalraising). Our projection is conservative relative to management’s NP guidance of Rp750bn in 2010 and Rp1,150bn in 2011 – implying ROAE of 16% in 2011. TP Rp1,700; risks are falling property values, higher funding costs and NPLs We derive our target price from a Gordon Growth model (see p. 4 for details). Risks are falling property values and the income levels of BTN’s low-to-middle segment customers; and high LDR exposing the bank to fluctuating deposit costs.