DBS Bank Rakyat Indonesia: Growth on track (Buy; Rp9,900; TP Rp11,100 )

At a Glance

• 2Q10 net profit of Rp2,167bn in line
• Earnings were topline driven with stable NIM; NPLs inched up.
• Maintain Buy and Rp11,100 TP

Comment on Results
2Q10 net profit of Rp2,167bn (+1% q-o-q; +26% y-o-y) was largely topline driven with strong loan growth (+8.3% q-o-q) while NIM remained flat at 9.4% as cost of funds stabilized after repricing of time deposits in the previous quarter. Micro and consumer loans continue to dominate BBRI’s loan portfolio collectively comprising 48% of total loans. Microloans grew 9.5% q-o-q, while consumer loans (76% of which are salary-deductible) grew 5.7%. Meanwhile, corporate loans make up 19% of total loans, with the agribusiness segment dominating the composition. Corporate lending has shifted to SOEs which carry lower risk. Deposits continued to grow at 6% q-o-q largely from low costs deposits, which currently comprise 57.6% of total deposits, with the aim of achieving 60%. Loan-to-deposit ratio rose to 88.4%. NPL ratios continued to inch up to 4.3% (from 4.1%) with the key drag still from the small commercial and medium segment. Note that 92% of the NPLs from the medium segment has been in restructuring or settlement process which amounts to almost Rp2trn (<1% of BBRI’s loan book). These are expected to be resolved in 2H10. Loan loss coverage was relatively unchanged at 146%. Government bonds which comprise only 4.5% of total assets are largely fixed rate (87%), but as the quantum to total assets is small, we are not overly concerned should interest rates start to rise. Total CAR was lower, as loan growth picked up. BBRI could possibly raise sub-debt to fund growth.

Little was said on BBRI’s acquisition of Bank Agroniaga. Further details will be provided once the MoU is signed. To reiterate, we view the acquisition neutral to mildly positive as Bank Agroniaga is a comparatively small bank with total assets less than 1% of BBRI’s total assets.

Recommendation
We maintain our Rp11,100 TP based on the Gordon Growth Model with the following assumptions: 28% sustainable ROE, Our TP of Rp11,100 implies 3.3x FY11 BV and 12.4x FY11 EPS. BBRI’s prospects remain healthy with strong NIM (albeit declining), and its ROE profile remains among the best thanks to high yield micro loans, which is BBRI’s forte.