Mansek BBRI:Lesser cobwebs in the closet

Like some other banks, BBRI also reported an increase in NPLs in 2Q10, with NPLs from the medium segment posted its highest rate since 2006. Despite that, we still expect BBRI to perform well with ROAE is expected to reach 29.0% in 2010 and 32.8% in 2011, respectively, thanks to its over 50% exposure to lower-risk NPLs and concerted efforts to deal with outstanding NPL. Maintain buy.

Problems in loans to medium segment… BBRI’s NPL from the medium segment increased to 14.9% at end Jun10, the highest NPLs among the segments and the highest NPLs recorded since 2006. Our talk with management highlighted the possibility of rising NPLs on the possible relapse in restructured loans.

… yet action plan is quite clear. However, the bank has disclosed a clear action plan to deal with this issue. Around 32.3% of the NPLs from medium segment (or equivalent to Rp734b) has been restructured and 59.6% (or around Rp1.4tn) will go for settlement (i.e through auction). The bank expects NPL from this segment to fall below 10% by the end of this year.

What is the positive catalyst? BBRI still recorded strong loan growth of 8.6% qoq in 2Q10, thus bringing total loan growth to 24.0% yoy. Micro loans posted the highest growth of 29.2% yoy, followed by small consumer loans of 26.6% yoy. Please note that the 76.3% of the bank’s consumer loans are in the form of salary-based lending, which is relatively secure as more than 50% of them are loaned to civil servants (and employees of state owned companies). Coupled with exposure to SOE which is also secure, in our view, we arrived at 52.3% of total loans with lower risk of NPL at end Jun10, an improvement from 48.4% at end Jun09.

Maintain a buy. Even though NPL showed an increase in 2Q10, we still like the bank for it still delivered high NIM (=9.4% in 1H10) and high ROAE (=30.5% in 1H10). Coupled with the bank’s serious effort to deal with NPLs, this high profitability should help the bank dealing with possible rising NPLs in the future. Despite that, we slightly adjusted our earning forecast for the bank to take into account the 1H10 results, particularly higher than expected provisioning expenses. ! Yet, we maintain our target price at Rp12,000/share, hence our buy call on the counter.