This was the first time the new CEO presented since he takes the reigns over from Agus Martowadojo.
The focus was more on the next five- year strategy (the so called transformation plan) which was full of superlatives: revenue in banking expected to grow at 17% pa in each of the next 5 yrs. This would be the most impressive in Asia. They aim to be one of Asia's top 5 banks in the process DOUBLING their mkt cap to US$ 25bn. This would mean their mkt share would grow from 12% to 18%. The strategy for this is 3-pronged 1) want to be dominant in wholesale 2) no 1 or 2 in retail financing (mortgage/personal loans and micro) 3) transform from being reliant on wholesale deposit dependant to being reliant on retail deposits. In general it means they aim to be less reliant on wholesale loans (down from 73% to 58% of total loan portfolio) and more reliant on retail (which they aim to grow from 50% to 65%). Consumer financing should triple from 6% to 17% and micro lending to quadruple from 2% to 9% of the mix. All high yield growth.
However straight up we were reminded about the RIGHTS issue which is coming at the latest in early 2011 so that the government will be able sell down to below 60%, triggering a 5% tax break for the bank and providing capital to support strong lending expansion.
Some questions on the NPLS, the new LDR requirement for minimum reserves set by BI last week, and the full implementation of PSAK 55
In general it is still impressive seeing an Indo bank present (as a China focussed sales) simply because the banking system has changed so much. It seems to have such a conservative (highest equity to asset ratio and reserve in Asia and very high credit metrics 200% coverage with NPLs now at 2.5% down from 26% at the peak) and attractive banking market (NIMs at 6% on average WoW). But PSAK 55 – the rule which states that Indonesian banks can NOT hold other banks (ie, hybrid) debt as capital – means the whole house of cards collapsing scenario which we had in the West – has much less of a chance of unfolding in Indonesia.
With Indonesia going the same route as China – ie, Bank Indonesia is tightening without raising rates through targeting RRR the quota – which stood at 7.5% but was raised to 10.5% on Monday 6th of Sept – there will now be more focus on raising fees and charges and possibly higher loan rates to offset the impact of higher funding costs associated with this manoeuvre.
In the recent 2Q10 results – released in July – loan growth was impressive at 8% QoQ and 20% YoY, with growth reported in all segments – but fuelled by higher yielding consumer and MICRO loan growth. Also there was a big jump in NIMs up nearly 10bps to 5.2% QoQ as earning asset yields began to expand a function of the higher LDR and shifting loan portfolio as spread income stands at over 51% of our 10CL forecasts.
Fee income remains strong as non-lending related fees increased 27% YoY led by credit card fees (+36%) and administrative fees (+41%).
Q&A focus on margin and ROE over the next 5 yrs. Because investors worried that 5.2% is not sustainable but co says will have high yield consumer loan growth so should rise.
Also worry that diversifying so quickly they would make the same mistake as bank rakyat and be overly ambitious. Some questions on loan pricing given their ambitious mkt share gain plan- they admit they will be "more competitive" in certain areas they wish to grow. Questions on whether the rights issue had been approved and what next steps would be. Parliamentary approval needs to be obtained by October. If deadline is missed moves to Feb.
NPLs remain at 2.5% and coverage ratio at 200%.
At 2.6x11PB, and an ROE of 22% and rising – the stock still seems attractive.
CLSA rates this a buy with TP of Rp7,000 (based on 3x11PB so still some 11% upside.
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