DMG Research Bank Rakyat Indonesia - Cost management offset by asset quality drop (BUY)

Bank Rakyat Indonesia (BBRI IJ) - Price: Rp8,950 BUY (TP: Rp10,800)

In-line net earnings. BRI’s Rp2.2tn of 1Q10 net profits (+7% QoQ; +25% YoY) was in line with market’s expectations and it forms 25% of our full year forecast. Key highlights: provisioning charges was a drag in the quarter as credit quality deteriorated but cost management and net interest income development were positive.

Cost management was offset by disappointing asset quality. BRI’s asset quality deteriorated in 1Q10 with gross NPL ratio rising to 4%. The drop occurred in all segments. Rp1.5tn of provisioning charges were made and loan loss cover fell to 147% (4Q09: 156%). Although this has not triggered us to change our earnings - the provisioning charges made 26% of our forecasts - we should watch NPL formation going forward. The bright spot was expenses management: costs fell 26% QoQ on personnel and general costs cutting. No branches and outlets were added in the quarter.

Lower cost of funds drove NIM expansion. On a consolidated basis (incl. Syariah financing) lending grew 2% QoQ or 28% YoY with sequential shrinkage only occurring in the small commercial segment in which competition has been acknowledged. Deposit base shrank 5% QoQ on seasonality and re-pricing of BRI’s fixed deposit drove cost of funds down by ~74bp QoQ or ~136bp YoY. Combined, NIM rose ~55bp QoQ and LDR hit 87%, the highest ever recorded. Our full-year NIM forecast is conservative (drop of ~26bp YoY) with upside risk should its loan volume in high-yielding segment gather stronger momentum. CAR stood at 15.4%.

Still our top pick. BRI is undemanding at 12.5x 2010f EPS (20% EPS growth) or 3.05x 2010f BVPS (top-of-sector ROE at ~28%, neck-to-neck with BCA). Regionally (including Singapore and Malaysian peers) it is trading at the lower pack of both metrics and forward multiples remain below one standard deviation versus historical averages. It is the consensus’ second favourite after Mandiri among large banks. BRI is still our top pick. Our two-stage DDM-derived TP of Rp10,800 implies 3.7x 2010f BVPS or 15.1x 2010f EPS.