· Teddy Oetomo (Report: “Gaining confidence”): Upgrade to NEUTRAL. We upgrade our rating on BBNI from Underperform to NEUTRAL on the back of higher confidence in management’s ability to deliver a turnaround and potential positive catalysts from the progress of haircut regulations for Indonesian state-owned banks.
· Gaining confidence. We believe that, we may have been too conservative on BBNI’s restructuring potential, as previously we believed that much of the low hanging fruit had already materialised. However, the decision of key executives to stay, announced in the 2010 AGM, indicates higher confidence from management to deliver on the planned restructuring. We see the potential for continuing write-backs ahead and a further decline in the NPL ratio, from 4.68% in FY09A to 3.65% in FY10E. In addition, we also estimate an improvement in yield on interest-earning assets from 9.4% in FY10E to 9.7% by FY12E. Thus, we increase our FY10-12E earning estimates for BBNI by 7.6-10.0%.
· Catalysts and risks ahead. On the positive side, we believe that the progress in approving the haircut regulations for state-owned banks will likely serve as positive catalysts for Indonesian state-owned banks. On the negative side, we foresee the risk of a share price overhang due to the potential for a rights issue in 2H10E. In addition, we believe that the return of risk aversion and uncertainty in global financial markets may serve as headwinds for BBNI’s share price, particularly given that during the 2008- 2009 global financial crisis, BBNI’s share price fell the most of the six Indonesian banks under our coverage.
· Increasing target price. We increase our target price from Rp2,200 to Rp2,400 on higher earning estimates. Our target price is derived based on Gordon’s growth model, implying 1.6x FY10E P/B and 9.0x FY10E P/E.
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