Micro-focused, TP of Rp12,200
Our BUY recommendation is based on the premise that the bank’s unique business model – specifically in the area of micro lending - high profitability and above industry loans growth will be sustained over the longer run. ROE has also been robust, at above 28% in 1H10, thanks mainly to the bank’s higher proportion of productive assets. NIM, while it has been declining since 2005, remains above the industry’s average. Loans growth continues to surge, hitting 11% year-to-date, albeit with slightly lower quality. Micro lending continues to be the bank’s main focus. The 1H results are not a surprise at all, and for the time being, our forecast remains unchanged. As for the TP, we extend it to 12-months, raising it to Rp12,200 or 4.0x FY11 PBV, justified by the 21% 3-yr EPS growth and 32% ROE.
Tackling its NPLs
1H10 NPLs rose to 4.3% as loan quality in the small commercial and medium segments continued to deteriorate. Total bad debts written off were around Rp800bn, mainly in the micro and retail segments, with the bank attempting to recover bad debts in other segments – specifically the medium segment – from restructuring. NPLs in the medium segment jumped to 14.9%, despite the bank’s efforts to tackling them through extensive restructuring. Thus far, more than half of the medium NPLs have been settled and around 30% of them are still being restructured. Assuming 50% of the settled NPLs are upgraded, then the medium NPLs are likely to reach 11% by YE10, in our estimates. Like the medium NPLs, bad debts in the small commercial segment have picked up as well, with the NPLs up to 6.5% in 1H. However, the management’s guidance is for small commercial NPLs to fall to 5% in 2H, as restructuring progresses. Should NPL targets in both segments be achieved, NPLs should fall to 3.6% by YE10, in our estimates, assuming 25% loans growth.
Sustaining high profitability
The NIM stayed at 9.4% in 1H, mainly on deposits re-pricing, although higher loans growth may also have helped. NIM guidance remains at 8.5-9.5% by YE10, or around 8.7%, in our estimates. While this is far from its 4-yr average, it is still above the industry’s average. Our assumption takes into account the greater funding needed to keep the bank’s loans growth at 25%. Indeed, the LDR has reached 88% and the easiest way for the bank to grow its deposits is to increase the proportion of TD, a product that is sensitive to interest rates. This appears to have been the case so far with the bank’s TD increasing to 42% from FY09’s 39%. Of course, the best way is still for the bank to grow its CASA to 60%, but this may take some time to be realized. Alternatively, BBRI could issue sub-debt to finance its loans expansion, while, at the same time, increase its Tier 2 capital. Whatever strategy the bank adopts, it will likely lead to a higher COF - although not by much.
CASA in focus
BBRI’s deposits growth was lacking in 1H. Much of the increase in deposits was mainly in TD rather than CASA. The priority has now shifted towards growing its CASA, through extensive marketing efforts, outlet expansion and product innovation. Cross selling is also helping, especially since the bank has more than 7mn debtors that the bank can tap and some 6,400 micro outlets. Presently, around 65% of BBRI’s saving accounts come from its micro segment. BBRI’s commitment to expand its infrastructure may come at a cost, but given its historic low cost-to-income ratio (CIR) of 41%, there is plenty of room for the bank to increase its presence, without hurting its earnings. We have assumed that the CIR increases to 45% by YE10.
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