Picking up steam
At a Glance
* 2Q10 net profit of Rp2,031m in line
* Loan growth picked up as expected (+8% q-o-q), while NIM expanded marginally to 5.2%
* Maintain Buy and Rp7,000 TP
Comment on Result
2Q10 net profit of Rp2,031m (+1% q-o-q, +33% y-o-y) was driven by higher non-interest income arising largely from treasury, as enhanced infrastructure and innovative payment solutions boosted transaction fees. Earnings are now more balanced with acceleration in micro, retail and consumer finance, instead of its legacy dependency on corporate loans. NIM inched up to 5.2% in 2Q10 as asset yields improved with strong growth of micro and consumer loans while cost of funds remained
flat. Loan growth was broad-based and strong at 8% q-o-q in 2Q10 (YTD: 10%), while deposits grew 4% (YTD: flat), bringing loan-to-deposit ratio to 66.3%. CASA-to-total deposit was stable at 57%. Operating costs were contained with cost-to-income ratio at 38%. NPL ratio was 2.5% while loan loss coverage remained high at 206% despite marginal downgrade of some commercial loans in its performing loan book. CAR fell to 14.6% (CAR ex-operating risk: 15.3%) along with loan growth, and is expected
to strengthen as BMRI prepares for its rights issue in 4Q10. BMRI has received the Finance Ministry's approval and is now requesting approval from parliament. We expect loan growth to accelerate again in 2H10 driven mainly by high yielding micro and consumer loans (including vehicle financing). BMRI would benefit if the BI rate is raised in 2H10 given most of its assets (largely government bonds) carry variable
rates, and it has a strong CASA base. Based on our sensitivity analysis, every 25bps BI rate hike would raise earnings by 3.1%.
Recommendation
BMRI remains our top pick. Our TP is maintained at Rp7,000 based on the Gordon Growth Model (implying 3x FY11 BV and 13.9x FY11 EPS) with the following assumptions: 25% sustainable ROE, 10% long-term growth and 15% cost of equity. The recovery of selected key NPLs, including Garuda (towards 4Q10), Argo Manunggal and Domba Mas, is on track. Our estimates do not incorporate the recoveries and tax benefits, which means there could be 12-15% upside to our forecast earnings.
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