Thursday, March 3, 2011

Bank Jawa Barat (BJBR) & Bank Tabungan Negara (BBTN)

by CIMB securities

• Maintain OVERWEIGHT. For Indonesian banks, 2011 could be reminiscent of 2008 in terms of loan growth, though not in its sudden liquidity crunch. Loan-growth upside is likely, riding the ongoing commodity upcycle, in addition to demand from fast-rising GDP. Yet, liquidity should be ample, unlike 2008, which is our main ground for believing that banks’ margins would be resilient, despite potential rate hikes. Banking stocks have corrected 14% from their recent peak, adding to their appeal, with CY11-12 P/Es coming down to 12.6-10.4x (excluding the pricey BBCA), cheaper than the market’s 13.5-11.2x. On a company-specific rather than sector basis, we favour Danamon, BTN, and Mandiri, while downgrading Rakyat to Neutral from Outperform. Sector catalysts could be imminent strong FY10 results, coupled with 2011’s still-high loan growth.


BANK JABAR BANTEN - Tough New Business

Maintain Neutral, but downgrade target price. We cut our FY11-15 EPS estimates by 4-15% as we raise our gross NPL assumptions by 0.2-1.4% pts, possibly introduced by the bank’s new business in micro lending. Our target price accordingly drops to Rp1,480 from Rp1,800, still using GGM with a discount rate of 15.7%. As its market for personal loans saturates, the bank would need to expand swiftly into the micro segment, very likely using pricing strategies. A lack of experience dealing with non-referral businesses could pose downside risks for asset quality, we believe.

Risks could be underpriced

Pricing strategy amid competition with BRI ... BJB would be rolling out micro-loans in its home provinces of West Java and Banten, where big players like Rakyat and Danamon are already present. To compensate for its beginner’s imperfections, BJB is very likely to fight for market share using pricing, given its lack of distribution and untested customer-relationship systems.

… which could lead to a mispricing of risks. The main reason for high lending rates for micro loans is their high intrinsic credit risks, as most micro loans are not properly secured with collateral. In case BJB sacrifices yields for market share, asset quality could be jeopardised, which is why we are raising our gross NPL ratio assumptions.

Valuation and Recommendation

Maintain Neutral with lower target price of Rp1,480. After raising our FY11-15 gross NPL ratio assumptions, we cut our EPS estimates by 4-15%. Our GGM target price accordingly drops to Rp1,480, implying 2.5-2.2x P/BV and 11.4-10x CY11-12 P/Es.

BANK RAKYAT INDONESIA - Paring Down Growth Expectations

Downgrade to Neutral from Outperform. We downgrade Bank Rakyat to Neutral as we cut our FY11-12 EPS estimates by 3-6% and target price to Rp6,250 from Rp6,650, still based on DDM with a discount rate of 16.0%. Hindered by its capital constraints, we now reduce our loan-growth assumptions by 19-20% yoy for FY11-12, from 20-25%. Unlike its peers BNI and Mandiri which had managed to offer rights recently, Rakyat has seemingly run into a dead end with its rights issue, as the government is unlikely to dilute its stake or inject more equity into the bank. Capital constraints will very likely limit its future loan growth and/or may force the bank to cut its dividends significantly. Should the bank change course to focus on less-capitalconsuming market segments, NIM erosion could be inevitable.

Between scaling bank loan growth, cutting margins and cutting payouts

None being a good choice. Based on our simulation, Rakyat’s current 13.5% CAR can only support another two years of loan growth, assuming its historical loan expansion of 25% p.a. Unlike its peers Mandiri and BNI, which had managed to offer rights by diluting the government’s stakes, Rakyat seems to be facing a dead end, as the government’s stake in the bank is already a low 56%, vs. 67-73% for Mandiri and BNI before their rights issues. The bank is doing its best to keep capital consumption at the same pace as capital increment from its operational earnings. Three alternatives to achieve this, if not a combination, are:

• Switching to low-risk-weighting assets, such as loans to SOEs that bear 0-50% of risk weightings vs. 85% for the micro & SME segment. This would soon be reduced to 75% by the central bank. This option does not seem to offer a good solution, as NIM should contract significantly, given a yield gap of 12-15% pts between the products.

• Slowing down loan growth, to avoid excessive capital consumption, which is also not a good solution.

• Cutting dividends, which may not be welcomed by investors.

Sub-debt not a solution either. Sub-debt may no longer be relevant, should Rakyat plan to go down this route. As Indonesian banks move towards Basel III that will be emphasising Tier-1 capital, sub-debt may no longer as useful as before. Besides, subdebt is costly and subject to amortisation by the central bank. When the sub-debt ages, it loses its contribution to capital, yet has to pay a similar amount of interest.

Valuation and Recommendation

Downgrade to Neutral from Outperform. With none of the above providing satisfactory solutions, we foresee a slowdown in Rakyat’s earnings growth sooner or later. Until the government is willing to dilute its stake or inject more equity to save Rakyat, we remain sceptical on its future growth. We reduce our FY11-12 loan-growth assumptions to 19-20% from 20-25%, cutting our FY11-12 EPS estimates by 3-6%. Consequently, our target price has been shaved from Rp6,650 to Rp6,250, implying 4.2-3.6x P/BV and 15.8-13.9x CY11-12 P/Es, still based on DDM method at discount rate of 16.0%.

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