Parliament approved plans for both banks to hold rights issue this year. This is a departure from parliament’s earlier stance that rights issue will be done by Bank Negara first this year followed by Bank Mandiri next year. BBNI is aiming to raise Rp7tn while BMRI wants to get Rp13tn.
Comment: While this might be seen as potential overhang for both stocks, we view this as a positive development. The rights issue is going to serve two purposes, in addition to the improved stock liquidity, that will positively impact both BNI and BMRI minority shareholders:
1) Capital Levels- Tier 1 capital will be increased at both banks allowing more flexibility in funding sources going forward, but more importantly increasing the capacity to lend at both institutions. Note that we anticipate low interest rates to drive above average loan growth in Indonesia over the next three years, and having the additional capacity to leverage the balance sheet is necessary. Post rights issue we expect continued leveraging at the banks to drive profitability.
2) Tax rate- The free float will increase a 5% tax break at both banks driving EPS higher after the first year. This will allow the banks to compete more effectively with Indo peers and drive greater profitability metrics to the bottom line.
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