Lift from lower provisions


DBS Group Research25 Oct 2018
  • 9M18 net profit grew 14.6% y-o-y, supported by lower provisions

  • NPL inched up to 2.5% from 2.3% in 9M17

  • Strong loan growth at 16.5%

  • NIM declined due to lower asset yield



What’s New
3Q18 earnings lift from lower provisions. Bank Rakyat Indonesia’s (BBRI) 9M18 consolidated net profit came in at Rp23.55tr (+14.6% y-o-y) – in line with expectations. The 3Q18 earnings were supported by lower provisions (-11.7% y-o-y) and strong recoveries (+34.9% y-o-y).

Strong loan growth. Loans growth was relatively strong at 16.5% y-o-y, driven by all segments except medium segment loans that booked negative growth at -14.3% y-o-y as the management is still formulating a way to maintain the quality of this segment. Micro segment grew +16.3% y-o-y, consumer +17.7% y-o-y, small commercial loans +19.9% y-o-y, and corporate +16.4%.

NIM declined due to lower yield. NIM declined to 7.5% from 7.9% in 9M17 due to fierce competition for consumer loans (especially payroll loans) and a lower KUR rate of 7% (vs 9% previously). Cost of funds was stable on a y-o-y basis at 3.4% despite rising interest rates. The management targets to maintain NIMs to be around 7.5% for FY18.

Stable cost-to-income ratio was kept in check at 42.0% (within lower end of the bank’s target of 42.0%-44.0%). Operating expenses was also stable at 11.1%. 3Q18 consolidated NPL rose to 2.5% from 2.3%, mainly driven by higher NPL for corporate (both SoE and non-SoE) and small commercial loan segments. For corporate, the higher NPL is coming from companies in oil & gas (syndication loan), water treatment (syndication loan) and agriculture (plant seed providers) industries. YTD NPL ratio has exceeded the Group’s target of 2.0-2.2% for the year. Management targets to lower the NPL ratio in the medium term once the on-going restructuring process is complete.

Lower provision expenses and stable coverage ratio. 9M18 provision expenses stood at Rp13.9tr (-11.7% y-o-y). This translated into lower credit cost y-o-y.

Tight LDR and flattish CASA ratio on a y-o-y basis. LDR in 9M18 was at 92.7%, slightly above management’s target of 88.0%-92.0% for FY18. Compared to 1H18, LDR was lower at 94.8%. CASA ratio was flattish at 56.5% in 9M18.

BRILink agents almost tripled y-o-y. The number of BRILink agents almost tripled to 272k (+97.2%), with immense growth in the number of transactions (+93.2% y-o-y) in 3Q18. Furthermore, fee based income from BRILink also grew 160.2%, gaining more portion from 5.3% to 11.9% in E-banking related fee.

Outlook
BRI Spot hits the ground. BRISpot, a digital system for the micro loan officers enabling them to process loans in a faster and efficient manner, has been rolled out. This has significantly improved underwriting time from 4-5 days to 2-3 days. On the consumer banking side, management has launched the MyBRI platform which reduces the approval time to a few hours instead of days.

CAR stood at high 21.4%, likely to maintain high payout this year. Management has guided that 45.0% dividend payout ratio (DPR) is the new norm for the next 2-3 years but it will maintain its capital adequacy ratio (CAR) above the 17.0%-18.0% level (already considering the new Indonesian Financial Accounting Standards (PSAK) implementation)

Lower loans growth for 2019. Going forward, management stated that loan growth for 2019 will most likely be slower than this year’s target range of 12.0%-14.0%.

Management stated that they are aiming for the micro segment to make up 40% of the bank’s portfolio mix from 34.5% in 9M18 and the corporate segment to 20% (or less) from 24.2% in 9M18. With this, we remain confident that BBRI will stick to what it does best – a major player in the micro lending segment.

With regards to its re-pricing strategy, the management stated that the adjustment will prioritise loans with promotional rates (i.e. corporate and consumer) instead of adjusting its micro portion.

Valuation and recommendation
Maintain BUY with TP at Rp3,900. Our TP (based on Gordon Growth Model – 19% ROE, 10% growth rate, and 14% cost of equity) implies 2.4x FY18F BV.

Quarterly / Interim Income Statement (Rp bn)

FY Dec 2Q2017 1Q2018 2Q2018 % chg yoy % chg qoq
Net Interest Income 19,083 18,622 19,623 6.7 0.2 
Non-Interest Income 5,595 4,840 5,378  43.5  16.0
           
Operating Income 24,678 23,462 25,001  13.7 3.6
Operating Expenses (10,545) (9,311) (10,431)  19.4  7.5 
           
Pre-Provision Profit 14,133 14,151 14,570  9.7  0.8
Provisions (5,718) (5,386) (5,246) (33.2) (38.3) 
Associates 0.00 0.00 0.00  - -
Exceptionals 0.00 0.00 0.00  - -
           
Pretax Profit 8,357 8,779 9.324 34.1 22.8
Taxation (1,567) (1,357) (1,812)  95.8  56.5 
Minority Interests 0.00 0.00 0.00  - -
           
Net Profit 6,790 7,422 7,512 21.5 14.7 
Growth(%)          
Net Interest Income Gth 10.5 8.0      
Net Profit Gth 2.0 (179.3)      


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