While core profits represented over 45% of our 10CL estimates, we note that 2Q is historically Rakyat's strongest quarter, and 1H results typically represent 47%+ of our FY estimates. Typically, 2Q represents the highest loan growth of the year, but given this phenomenon, we believe higher than normal growth could be experienced in 3Q. Agriculture lending accounts for approximately 7% of the total loan portfolio.
The Bad:
Higher expenses, as personnel costs increased 24% QoQ also contributed to core profits falling were a negative mark on the quarter.
The banks reported written off loans of 800bn, if these loans were to remain on the balance sheet BRI would have reported NPL's of 4.7%. In addition, while the reported decrease in coverage from 147% to 145% is relatively inconsequential, if we account for the written off loans, coverage fell to 135%.
Recoveries were approximately Rp380bn.
The Good:
Loan growth (+10%) could be higher in 3Q as the rainier 2Q10 led some farmers to delay planting, we think this could lead to higher 3Q loan growth than historically seen if rains subside. Agricultural lending is 7% of the loan book.
The NIM remained at 9.4%, meaning the downside appears to be relatively contained as loan book composition appears to be stabilizing.
While deposit growth continues to lag lending expansion, reaching 6% in the quarter, we note the pickup in demand deposits to Rp45.4tn, representing a 24% QoQ increase. Absolute growth in CASA funds covered 90% of the loan growth in the quarter. The core deposit ratio increased by 200bps to 57.1% QoQ.
The bank lowered its tax rate in 2Q to 20%, if permanent this will allow additional earnings to flow to the bottom line.
Valuation still remains attractive as BRI trades at 2.8 PBV and 10.9x PE, this is only a modest premium of 7% to peers on PBV, and a 15% PE discount for one of the most profitable banks in Asia.
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