CLSA Bank Rakyat Indonesia (BBRI IJ), maintaining BUY

Bret Ginesky is looking at Bank Rakyat Indonesia (BBRI IJ), maintaining his BUY call. BBRI offers a ROA and ROE above its Indonesian peer group while trading at a PE discount. Maintain our TP of Rp10,700 representing 11.6x and 3.0x our 11CL PE and PBV forecast, respectively, and a PBV premium justified by superior profitability

Shares have been under pressure recently since earnings announcement two weeks ago. Higher NPLs and a lower CAR raised investor concerns.

Bret’s view:

(1) NPL concern
NPLs remain in line with historical levels and should improve in 2H10. Moreover, the current capital levels can support loan growth through 2010, and we anticipate a subordinated debt raise in 2011.

Historically, BBRI’s gross NPLs have been 4.2% which implies that the continued increase over the past two years represents a reversion to the historical mean. Absolute NPL figures are substantially higher, but the seasoning of the loan book (+71% since 2Q08) reflects the increase.

Management’s initiative in addressing problem loans within the medium and corporate segments should lead to improving metrics.

Provision coverage. We also would like to add that the allowance for loan losses remains north of 6% and have been increasing throughout the year, as BBRI has been increasing its provisioning. Under PSAK 55, BBRI is likely going to have to lower provision building going forward, and we have seen this with other Indonesian banks, as provisions have decreased. As you can see from the chart below, BBRI’s coverage of NPLs has remained relatively flat at historical metrics going back through 2001.

(2) CAR
BBRI’s CAR stands at 14.1% a metric that is in line with its Indonesian peers. By our calculations, over Rp10.0tn in recap bonds will mature in the next 24 months, a 2011 subordinated debt offering, and retained earnings should shore up any equity concerns.