DBS BBTN Indonesia’s mortgage leader TP 2100

• Largest mortgage lender with a leading competitive advantage and solid track record
• NIM and ROE acceleration leads to 33% 2010-12 earnings CAGR.
• Strong demand for housing with improved macro environment and emerging middle income group
• Initiate coverage with Buy and Rp 2,100 TP

Initiate coverage with Buy call and Rp2,100 TP. BBTN commands 98% market share of the subsidized mortgage loan market as the segment needs customized credit origination and collection platforms, which other banks do not possess. BBTN has been originating subsidized mortgage loans since 1976, refining its platforms, putting it at a competitive advantage over potential entrants. Our TP of Rp2,100, equivalent to 2.6x FY11 BV and 16.4x FY11 EPS, is based on the Gordon Growth Model with the following assumptions: 18% targeted ROE, 13% longterm growth and 15% cost of equity.

33% earnings CAGR over FY10-12 driven by NIM and ROE acceleration. The new scheme for subsidized mortgages via a liquidity facility by the government, which will be finalized soon, is poised to lower cost of funds for BBTN. BBTN’s tie-up with the post office and expanding kiosks in remote areas gives it a larger network to capture
low cost deposits. We expect NIM to increase from 5.2-5.4% over 2010-12 coupled with 22-27% loan growth and 23-24% deposit growth, leading to 33% earnings CAGR with ROEs accelerating to 14-18% over the same period.

Strong demand and improved economic conditions to boost housing growth. With the low mortgage penetration rate of 2% to GDP, we believe there is ample room for growth. Home ownership is believed to be low at present. However, the penetration rate is likely to increase steadily as GDP per capita rises coupled with improved macroeconomic conditions as well as population growth. In addition, we believe that the emerging middle income class would also add to potential demand for housing. All these fit into key ingredients for BBTN’s growth potential.