JPM Bank Rakyat Indonesia - 2Q results: profits in line, but NPLs continue to build

• Profits flat q/q: BRI’s 2Q PAT grew by 22% y/y, but was flat q/q. The stock slightly declined on Friday trading (after results) but bounced off intra-day low levels. PPOP was stable q/q and down 5% y/y. Net profit was supported by slightly lower provision coverage and a low (17%) tax rate in 2Q. We do not see these results as reason to drive further upside for the stock relative to the market.

• Strong credit growth continues: Loan growth at the end of 2Q continued to be strong at 26% y/y. We are encouraged by the strong growth in micro (Kupedes) and consumer loans, which we see as BRI's core business. Micro lending slipped below 25% of loans in 1Q, but was back at 26% of lending in 2Q. On the corporate side, BRI's loans to SoEs grew by 65% y/y. 2Q saw acceleration in FX loans, which were up 19% q/q, mostly to SoE oil majors.

• Kupedes customer growth recovery resolves one of our longer term concerns: BRI has shown an increase in Kupedes customers of 0.5m over the last 12 months. It now appears that the decline in Kupedes growth was driven by cannibalization from the KUR scheme, and as that has become less of a priority the core business has recovered. We see this as a positive development for our long term view on BRI.

• Further deterioration in asset quality reason for maintaining UW: A further deterioration in asset quality was the major negative to us. As growth returns elsewhere in the sector, we think the focus may move to NPLs and hence retain our UW on the stock. BRI has outperformed the JCI by 7% over the last quarter, neutralizing prior underperformance. We think the rally could be capped from here, and recommend taking profits. We are rolling forward our PT timeframe to Jun11 from Dec10, and adjusting risk free rate to 9.5%), thus raising it in the process to Rp8,500. Key risks are a reduction in NPLs boosting RoE, and strong growth.