Despite 1Q10 results being in line with our expectation, we maintain SELL on BBCA with a fair price of Rp5,150. Earnings may grow more slowly this year due to slower loan growth and lower earnings yields.
Results
Bank Central Asia’s (BBCA) 1Q10 net profit came in at Rp1.9t (up 18.3% yoy), which is in line with our 2010 net profit forecast of Rp7.6t.
NIM declined to 5.5% due to changes in accounting standard. 1Q10 net interest income declined 25.2% yoy to Rp2.9t, representing 1Q10 net interest margin (NIM) of 5.5% (vs 7.0% in 1Q09). However, this NIM figure is not comparable to that in the previous period due to some reclassification arising from the implementation of a new accounting standard (PSAK 50-55). If we exclude reclassification from this new reporting standard, net interest income would have decreased 7.9% yoy to Rp3.5t due to slower loan growth and lower average interest rates.
LDR shrank to below 50%. 1Q10 loan deposit ratio (LDR) contracted to 49.6% (vs 50.3% in 4Q09 and 51.2% in 1Q09). This was mainly attributable to third party funding (up 15.7% yoy) growing faster than loan books (up 12.7% yoy). Management claimed that BBCA’s credit growth has been higher than the industry average in the last five years but is still slower than deposit growth. To improve LDR, the bank aims to strengthen its mortgage loans, which enjoyed the fastest growth in BBCA’s loan portfolio.
Proportion of low-cost funding kept declining. Third party funds grew 15.7% yoy to Rp242t in 1Q10, but the proportion of low-cost funding such as CASA declined to 72.6% (vs 73.3% in 4Q09 and 75.0% in 1Q09). Meanwhile, BBCA’s deposit growth was much higher than the industry average of 9.1%, but was mainly driven by time deposits (up 23% yoy), whereas the industry’s deposit growth came mainly from savings (up 19.3%).
Stock Impact
Weaker NIM. Even excluding the impact of the new accounting standard, we expect NIM to decline on the back of lower LDR and declining proportion of low-cost funding. As one-fourth of BBCA’s earning assets comes from SBI and variable-rate government bonds, we would see low asset yields due to lower average interest rates this year. During our recent company visit, the bank indicated that NIM may hit a low of 5.5% this year.
Earnings growth would decelerate this year. The bank may not increase its loan growth significantly amid stronger economic growth as the bank is likely to maintain its conservative stance on loan disbursement. As such, LDR is envisaged to remain at about 50% this year. Considering this and higher operating expenses as the bank has added 35 branches and 540 ATMs nationwide in the past three years (new branches take 2-3 years to break even), earnings may grew at a slower pace of 12% vs 18% in 2009.
Consumer loans may increase but contribution to earnings is still negligible at the moment. The bank aims to boost LDR by strengthening its consumer loan segment, especially mortgage loans. Mortgage loans as of 1Q10 jumped about 36% yoy to Rp13.7t but the proportion of mortgage loans was only 11.4% of total loans during the period, which accounted for only about 5% of total earnings asset income. BBCA is also considering entering the motorcycle financing business at the end of this year, but the contribution from this new venture may not be significant in the next 2-3 years as the bank needs to gain experience before this business could pick up in the long term.
Earnings Revision
We maintain our earning forecasts as the results are in line with our expectation.
Valuation/Recommendation
Reiterate SELL. Maintain SELL due to expectation of lower earnings growth. Besides, we believe the bank’s good corporate governance and operational excellence have already priced in premium valuation. Based on Gordon Growth Model and assuming sustainable ROE of 27%, normalised growth of 13.5% and risk-free rate of 9.5%, our fair P/B for BBCA is about 4x, or Rp5,150.
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