UOBKayhian Bank Rakyat Indonesia 1Q10: In-line results

BRI’s 1Q10 results in line with our estimate. The results show strong growth potential despite the impact of seasonality on 1Q10 performance. Maintain BUY with a target price of Rp10,200.

Results
Bank Rakyat Indonesia (BRI) posted a net profit of Rp2.2t (+25.1% yoy; +7.2% qoq) in 1Q10, achieving 25% of our 2010 forecast. BRI reported 1Q10 figures based on new PSAK 50 and 55, while 1Q09 figures were still based on PSAK 31.
Improvement in NIM offset soft loan growth. Net interest income grew 7.5% qoq in 1Q10 due to an improvement in NIM that rose to 9.4% from 9.1% in Dec 09. The improvement in net interest margin (NIM) was driven by a fast decline in cost of fund to 4.8% in 1Q10 from 5.1% in 4Q09. BRI benefitted from the re-pricing of high interest rate deposits offered in end-08 and early- 09 during the tight liquidity period. Operating expenses dropped 4.1% qoq so the cost efficiency ratio declined to 38.15%. Loans grew 1.7% qoq, relatively slow, but this was caused by seasonality as companies normally repay their loans in 1Q and start to draw down from 2Q onwards.

Loan quality declined slightly. Non-performing loan (NPL) ratio rose to 4.1% from 3.5% in the previous quarter. The deteriorating loan quality was driven by two factors: a) seasonality and b) legacy of NPL in mediumsegment loans which rose to 14.06% in 1Q10 from 6.60% in Dec 09. Medium-segment loans are managed by the headquarters instead of regional offices. NPL coverage was adequate at 147.21%.

Stock Impact
NIM recovery. BRI’s NIM had been declining since 2008, but has shown a recovery. If we exclude the impact of high interest rates in 2009, the downtrend in NIM in the last few years is mainly driven by the bank’s strategy to increase the proportion of low-yield loans such as corporate and mediumsegment loans. Management has set the maximum composition targets of corporate and medium-segment loans at 20% and 10% respectively while in 1Q09 the composition of corporate and medium-segment loans was 19.0% and 7.2% respectively.

Asset quality to improve. Although BRI implemented more stringent provisions than required by Bank Indonesia’s regulations, BRI’s NPL ratio should improve on the back of a better economic environment and settlement of some problem loans in the medium segment. At the same time, BRI and other banks should benefit from the implementation of a new reporting rule.

Please note that BRI still reported 1Q10 NPL based on the old PSAK rule. Stronger loan growth. We are upbeat on Indonesia’s economic growth, which is positive for the banking sector’s loan growth. We forecast 20% loan growth in 2010 as BRI will have more liquidity with the expected issuance of Rp2t sub-debts in mid-10.

Earnings Revision

None.
Valuation/Recommendation
We maintain our target price at 4x 2010F P/BV or Rp10,200. We assume risk-free of 9.5%, equity risk premium of 5% and sustainable ROE of 25%. Currently the stock is trading at 3.5x 2010F P/BV.