Credit Suisse Bank Negara Indonesia INCREASE TARGET PRICE: 2Q10 results - charging forward

61% YoY jump in 2Q10 earnings: BBNI’s 2Q10 earnings jumped 61% YoY, but declined by 11% QoQ due to lower write-back recognised in 2Q10 versus 1Q10. 2Q10 PPOP jumped by 21% YoY and 14% QoQ, signifying the bank’s continuously improving fundamentals. 1H10 earnings were up by 61% YoY, 47% of our old FY10E forecast and 52% of consensus estimate.

Continuing transformations: BBNI’s 2Q10 earnings exhibit significant improvements in low-cost deposit franchise, whose contribution to total deposits jumped from 53% in 1Q10 to 60% in 2Q10. While it is still early days of BBNI’s strategic decision to strengthen its low-cost deposit franchise, the initial result has been very promising. BBNI’s improving human capital in the recent past also provides evidence on the bank’s seriousness to continue pursuing fundamental transformations. We foresee potential for BBNI to continue operational improvements ahead, and we increase our FY10E-FY12E earning estimates by 0.4%-8.5%.

Between right issue and asset recovery: Management indicated the likelihood of completing BBNI’s rights issue by end-2010. We believe that prompt completion of the rights issue will benefit BBNI’s share price outlook as it will reduce the overhang period. Though management remains relatively uncertain, it sees the possibility for further asset recovery if it is able to execute haircut on written-off loans.

Undemanding relative to peers: We believe that BBNI’s valuation remains undemanding relative to its peers. BBNI’s P/B re-rating since November 2008 is well justified by its expanding ROE, and BBNI is trading below its historical average P/E. We maintain our OUTPERFORM rating on BBNI and increase our target price from Rp3,000 to Rp3,500 on higher earnings estimates. Our target price for BBNI is based on Gordon’s Growth model, implying 2.25x 2010E P/B, 12.96x 2010E P/E, 1.9x 2011E P/B and 10.6x 2011E P/E.