BNPP BBNI Moving into the next league

Loan growth set at 10% for 2010 due to capital constraint.
However, BNI is set to see further earnings improvement.
Increasing share liquidity and rights issue to raise >IDR6t.
Raise TP to IDR3,800 based on 2.5x P/BV 2011E. BUY.

Loan growth limited in 2010 but should pick up in 2011
Bank Negara Indonesia (BNI) is likely to see 10% loan growth in 2010, instead of
the earlier guideline of 15%, as management is concentrating on the rights issue. Management believes that the 11.1% Tier 1 CAR (total CAR 13.8%) is insufficient to support high loan and asset growth, and a significant capital injection, such as the rights issue, is needed. In our calculation, BNI will see Tier 1 CAR of 8-9% (total CAR of 11.3- 11.5%) in 2010-11, which is relatively low according to the Indonesian banks’ standard. While we are yet to factor in the impact of the rights issue, we
expect 19% loan growth in 2011; the industry is likely to see more than 20% loan growth on rising consumption and capital expenditure from various industries.

Expect further earnings improvement
We tweaked our earnings for BNI in view of its stellar performance in 1H10, which saw earning grow 61% y-y to IDR1.9t versus 35% for average banks during the same period. The good results were due to the improvement in net interest margin to 5.9% and the lower NPL of 4.3%, which brought down provisioning charges significantly. In addition, BNI recorded IDR833b loan loss recovery in 1H10, which helped boost
earnings; we anticipate more recovery in the future. We expect NIM to improve slightly as loan expansion and declining NPL should lead to earnings improvement.

Share liquidity and rights issue
The government sold 474m shares or 3.1% of the outstanding shares in a green-shoe offering. This reduced the government ownership to 73.3% and improved share liquidity. The plan to conduct a rights issue is pending parliament’s approval, and the bank expects to finalise this by the year-end to raise at least IDR6t. We are yet to take into account this Tier 1 capital injection, which will bring the bank at par with other large banks in terms of CAR and ability to grow.

Raise TP to IDR3,800 based on 2.5x P/BV 2011E
While the anticipated rights issue may provide some overhang, it would be positive for BNI’s future earnings growth. We raise our TP to IDR3,800 based on 2.5x P/BV 2011E, which is 1 STD above the average valuation in the past ten years. Downside risks include an economic slowdown and more than 200bps interest rate hike in less than 12 months.