We change our recommendation from HOLD to BUY given: 1) NPL signaling to dip further 2) right issue is likely implemented in the near-tem 3) strong earnings in 1Q10 above our expectation 4) ROE continues to go north 5) BBNI loan is leveraged to domestic growth. Thus we increase our TP from Rp2,300 to Rp2,800.
1Q10 PPOP Up By 6%
Bank Negara Indonesia seems did a splendid job in the first quarter of 2010, with net profit jumped 62% YoY to Rp1,0 trillion. However pre-provision operating profit only up by lower margin at 6% YoY as net interest income rose slightly by 4% due to growth in interest income was offset by higher growth in interest expense. Low interest rate regime put NIM shrank by 20 bps quarterly and 40 bps yearly.
NPL Continues to Dip
NPL continues to dip lower to 4.6%, lowest level since 4Q07 with no longer due to massive write-off. NCO rate trimmed down to 80 bps compared to 280 bps in 4Q09 meanwhile recovery rate was at 30 bps of total loan. BBNI targeted Rp750 billion to Rp1 trillion loan recovery this year given positive expectation in economic recovery. It is worth noting that most of BBNI NPL debtors engaged in manufacturing industry which is leveraged to domestic economy. With Rp750 billion loan recovery, 3% estimated new NPL and 230 bps NCO rate, we expect NPL ratio in FY10F will be at 4.3%.
A Series of Capital Infusion
Given stringent capital requirement for banks to bet their own money against risky assets, we believe BBNI will conduct a series of capital infusion through subdebt and right issue at least in the first quarter of 2011. We projected CAR by the end of 2010, will be at 15.2% assuming US$300 bn dollar subdebt been executed. Meanwhile right issue is an essential matter for BBNI to increase their Tier-1 CAR ratio (core capital). Based on our preliminary scenario, right issue is positive for BBNI shareholder and for the banks since it gives a less dilutive impact due to: 1) an increase in bottom line due to 5% tax benefit deduction. 2) fund from right issue will be placed on SBI instrument that will yield of about 8%.
Valuation and Recommendation
Currently BBNI is valued at big discount with 1.3x PBV and 7.2x PE FY10F. With ROE is already improving and NPL starts calm down, and right issue is likely been approved and executed in the near term (at least in 1Q11) we change our recommendation from HOLD to BUY to the stocks. Our new TP is based on Gordon Growth methodology using sustainable ROE 20%, 10% long-term growth and 15.1% cost of equity yielding new TP from Rp2,300 to Rp2,800. BUY.
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