DBS BBNI Getting it right Price Target : 12-Month Rp 4,500

• Transformation evident through improved asset quality, operating efficiencies, strong loan and CASA growth traction since 2006
• Rights issue would strengthen capital for future loan growth and secure tax benefits
• Initiate coverage with Buy rating and Rp4,500 TP, implying 29% upside; no reason to trade below industry average; BBNI is our new top pick

Initiate coverage with Buy call and Rp4,500 TP. BBNI is too large a bank to ignore. Currently ranked 4th by asset size, it is the cheapest bank under our coverage. We see no reason why it should trade at below industry average valuations given its positive prospects. The completion of rights issue would strengthen BBNI’s capital to fund future loan growth. There has been substantial progress in the last
three years, with legacy asset quality issues resolved, cost of funds lowered, and improving operating efficiencies. Our Rp4,500 TP is based on the Gordon Growth Model, and equivalent to 2.7x FY11 BV and 14.2x FY11 EPS with the following assumptions: 20% targeted ROE, 13% long term growth and 15.6% cost of equity.

Rights issue will strengthen capital and fund future loan growth. The c.Rp10trn rights issue will raise BBNI’s CAR to above 18% from 13%. This exercise would be one
of the largest capital raising transactions in Indonesia. The structure of the rights issue has not been finalised and is pending Parliamentary approval. Apart from strengthening capital, the rights issue will dilute government ownership
from 73.3% to 60%, and raise BBNI’s free float to 40%, resulting in a 5ppt tax reduction.

Transformation yielding positive results. BBNI started its transformation program in 2003, but substantial progress was only seen in the last three years. It has yielded
positive results, exhibited stronger loan growth, created a larger base of low cost deposits, and improved asset quality. BBNI is gathering pace and positioning itself as a universal banking franchise.