Citigroup Bank Tabungan Negara - Initiate with Sell: Balancing Valuations with Risks

 Trading at a Premium — We initiate coverage at Sell/High Risk (3/H). Our Non-consensus Sell is based on 1) expensive valuations and 2) below consensus 2011/12 EPS forecast (15-17%). Forward PER (Consensus) of 17.4x compares with peak or above-peak PER for larger banks, with a weaker deposit franchise. Our EPS growth forecast for 2010-12 of 23% pa is based on 26% pa loan growth (management guidance) and flat NIMs/Credit Costs. In our opinion, consensus expects rising NIMs, in line with management’s goal of improving ROA from 1.4% to 2%. Our DDM-based target price implies 2011F PER of 12x and P/B of 1.9x.

 Changing Business Model — BBTN is a state-owned bank set up to provide 1) mortgages subsidized by the government to mostly civil servants and 2) nonsubsidized mortgages. Future goal is to raise ROA via 1) consumer loans to existing 1.2mn customers and 2) SME banking and 3) build CASA through network expansion and a tie up with the Post Office.

 Will be a Slow Process — The share of Consumer/SME loans must increase from 8% to 20% to lift ROA significantly (40%+ pa growth needed over the next 5 years). This will increase administrative and credit costs, as it requires upgrade of skills and technology. Deposit mobilization through Post Office tie up is slow and branch expansion will compete with other banks like BBRI.

 Competition at High End — The front-end rates have been declining with banks offering fixed rate of c~9% for the first two years. While BBTN operates at the low end of the market, it may face competition in middle market (non-subsidized).

 Pressure Points — LDR is > 100% with CASA only 30% of deposits. Maturities of c~80% of assets is >1 YR and of c~70% of liabilities is upto 1 month. Re-pricing risk is mitigated by floating nature of loans/bonds, but liquidity reversal risk is high. Gross NPLs have are up from 3.4% in Dec 09 to 4.1%, even in low inflation.