1H10 result beats forecast, TP of Rp3,650
We upgrade our FY10-11E EPS estimates by 15-10% respectively on lower provisioning charges – mainly due to loan recovery. While loan recovery may not recur next year, the bank’s aggressive internal restructuring will ensure that such low provisioning charges be maintained in 2011. Provisioning aside, loans growth is still weak, as corporates settle their debts, about Rp6.7trn in 1H10. Loan quality improved, however - albeit largely on write-offs. The NIM stabilized at 5.8% on a QoQ basis and remains above the industry average. We extend our TP to a 12-mth period, raising it to Rp3,650 or some 2.4x FY11 PBV. BBNI remains our preferred stock in the banking sector, given its cheap valuation and turnaround story. BUY.
Accelerating loans growth
Loans growth was unexciting in 1H10. We feel this partly reflects BBNI’s internal restructuring that may delay approvals amid changes in key personnel. Debt settlement of corporate loans also exacerbated the situation. However, the 2010F guidance remains at 14-17%, a target that can easily be surpassed if the bank maintains a NIM of 5.7-6.0% this year. Also helping is the fact that BBNI has cleaned up all of its bad debts, opening the way for more aggressive loans expansion. Thus far, corporate and SME loans have dominated the loans – at some 80% of the bank’s total loans, but the trend appears to be shifting towards high yielding consumer loans. Note that loans extended to consumers have grown by 13% year-to-date, far exceeding the other segments. Mortgages still account for almost half of BBNI’s consumer loans, as interest rates are low. In a way, expanding its loans to the consumer segment helps sustain its overall loan quality as the NPLs were a mere 1.6% in 1H10.
Restructuring continues
NPLs dropped to 4.3% in 1H10, albeit largely on write-offs. Indeed, about Rp2.2trn of total loans were written off and much of them were related to the middle segment, for which NPLs were as high as 8.5% in 1H10. A lack of industry focus is cited as the reason. Nonetheless, further declines in the middle segment NPLs are expected as the bank’s management attempts to tackle the problem by identifying the specific industries to which it will channel its loans in the future. All segments saw relatively stable NPLs, with the exception of the Sharia business, where NPLs rose to 4.2% from 1Q10’s 3.7%. The coverage ratio went up to 123% from FY09’s 120% - partly due to lower NPLs aside from an additional Rp2trn in provisions. Interestingly, along with the significant loans written-off, the recovery rate has picked up in recent years. On average, the recovery rate is around 28%.
Attacking its COF
Now the name of the game is for the bank to keep its NIM above 5.7%, especially since loan growth is still lacking. The COF declined to 4.2% in 1H, as low cost funding (CASA) picked up to 60% from FY09’s 54%. BBNI’s aggressive lending to consumers has in fact yielded some additional savings. Cross selling activities also help. The idea is to provide loans to corporates at prime rates, with the expectation of managing transactional activities related to the debtor. This has worked well so far. The management has indicated that such a proportion of CASA can be maintained in the long run.
10 months transformation
The bank’s so-called “consumer centric” approach aims to align business strategies – be they lending or securing funding – based on consumer profiles. Put simply, the focus is now on customers rather than products. This is a good strategy, we believe, and could create closer long-term relationships and therefore better profitability. The strategy is put to work in two phases. Firstly the bank has to hire the right people – something which BBNI has done recently - and secondly the bank has to implement the strategies top down. Three key new directors are already in place. Honggo, a prominent banker, is responsible for the bank’s business network; he is the one tasked with changing the bank’s corporate culture towards being profit-oriented. Darmadi, meanwhile, is responsible for growing BBNI’s consumer loans and securing retail funding. The other new director, Adi, is responsible for treasury. The transformation has already begun and the first phase is expected to take 10 months to complete. The impact is not expected to be seen until next year.
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