AAA PT Bank Negara Indonesia (Persero) Tbk Between Performance and Dilution

Greenshoe, done
Greenshoe finally executed by the government at prices Rp2,900/share with funds reaped as much as Rp1.3 trillion. 473 million shares greenshoe was oversubscribed up to 3.93x. Some of institutional investors that participated in this event were Jamsostek, DP (Pension Fund) Bank of Indonesia, DP Pertamina, Fidelity Investment Ltd and Invesco Hong Kong. High demand for greenshoe in our view was associated with 3% price discounts from previous day closing price (Wednesday,11/8) and the potential improvement for BBNI post right issue.

…Then Right issue, Double The Size is Probable
As we predicted earlier, Bank Negara Indonesia will be the first runner of rights issue than Bank Mandiri due to the bank’s capital adequacy ratio already in minimum level. BBNI’s CAR as of 2Q10 was 13.8% while BMRI was at 15.3%. Until now, the target proceed from rights issue has not been changed, Rp4-5 trillion. However if we refer the exercise price same with greenshoe, we estimate BBNI will receive total funding of Rp9.6 trillion which will add total CAR by 600 bps from our initial estimate of CAR in FY10F, from13% (without the rights issue) to 19% (with a rights issue).

The Effect
Rights issue will have positive impact on bank performances because with a higher CAR position, BBNI will be able to expand credit of 22% per annum over the next 5-6 years. In addition, with 40% floating BBNI will get a 5% tax reduction rate, which means the tax rate will be 23%. (2009, 28%). Nevertheless, we expect ROE would fall from 21.8% to 19.7% since the increasing total equity, 45% is higher than the 7% increase in net profit, due to tax incentives. It should be noted that historically, BBNI share price tends to follow its ROE level, so the decline in ROE post rights issue could be a negative catalyst.

Valuation, Upgrade TP to Rp3,600 maintain HOLD recommendation
Currently BBNI is trading at 2.3x PBV FY11F, 29% lower than the 3.0x peers PBV. In a glance, it looks cheap but we see the market pricing its share in a quite fair value since BBNI is the bank with minor ROE compared to peers. Since the CAR ratio is limited, going forward to skimp CAR ratio, we see BBNI will retain dividend payout ratio at 35%, or the same level in 2009, previously we estimate the sustainable dividend payout is 50%. The decline in dividend payout in 2011 and beyond increasing our target price for the bank from Rp3,100 to Rp3,600. Our TP implies 1.9x and 10.8x PE FY10F PBV. We still maintain our HOLD recommendation on the potential of declining ROE which could suffer its share performance and our TP provide only 9% upside. Year-to-date, BBNI share price already rose 70% compare to peers 20%.