Thursday, December 15, 2011

Bank Central Asia - An Aggressive Aggressor

by Trimegah Securities

Aggressively Invading the Loans Market

Under new president director Mr. Jahja Setiaatmadja, BCA puts more aggressive power/force on the loans market. The need to embrace higher yielding assets is imminent as the bonds market continually proceeds on a bullish stance, and BI rate cuts build added pressure on profitability given more intense competition on funding sources. BCA has increased its maximum deposit rate by 75bps to 6.25% so as to maintain stable market share of time deposits. We believe that similar policies need to be applied/ adopted on CASA sooner rather than later, since depressing (overall) Cost of Funds by cutting interest rates on CASA cannot be sustained over a longer period. Tight competition will push management to uphold its strategy of focusing on the loans market through a combination of aggressive pricing and network expansion. BCA’s mortgage promotion rate of 7.5% has become a tremendous success and is accompanied by strong growth in overall loans portfolio as BCA pushes rates at 100bps -200bps lower relative to other banks’ pricing.

Transactional Banking to Maintain Overall Profitability

Today, BCA faces increasingly tighter competition wherein competitors aggressively expand transactional banking capabilities. While BCA may no longer command the most extensive ATM and branch network, we believe the quality of its network reserves undisputed superiority, given that total transaction frequency of 1.5bn vs. 300mn of closest competitor Mandiri. These statistics suggest that customers use the BCA network 5-times more often relative to its competitors. We believe that the next shift in the transactional banking model favors electronic banking channel since total transaction frequency supported has surpassed that facilitated by conventional branch banking and total transaction value has increased 37% YoY for internet banking vs. 14% YoY for branch banking. This is indication that customers presently rely on internet banking feature for large-value transactions as they have begun to grow accustomed to its convenience and safety. We believe that transactional banking presence is crucial in safeguarding bank profitability. BCA transactional banking services could afford ~40% of operating expenses and serves as a cushion against slower loans demand. For a sound business model, we believe BCA is the only bank with capacity to secure a balance of profitability and coverage ratio going forward. We have seen some competitors starting to pull back on provisioning for the sake of profitability as supported by IFRS implementation. BCA, in contrast, continues to preserve profitability at 340% - 350% range while locking in ~26% ROE.

BCA Inc. to Kick In

We expect BCA ventures into new business segments will start to kick in some profit contribution within the next two years. One of the aggressive expansion initiatives is BCA Finance, the bank’s multi-finance subsidiary with focus on automotive financing. BCA Finance is eyeing for Rp19tr total financing in 2011 and expects total financing to reach Rp27tr in 2012. We believe such targets are attainable despite a global market downturn because the principal strategy rests on gaining market share instead of venturing into new growth areas/pockets. BCA is currently also grooming a motorcycle financing arm, as well as insurance and securities companies. The overall corporate strategy is to provide a comprehensive product offering with cross selling orientation to all customers, which comprise private businessmen and the nation’s largest corporations.

Maintain BUY, TP of 8250

Despite BBCA does not provide much upside potential to our TP, we continue to like BCA for its growth capacity, clear competitive advantage, and very strong management quality. Investors should consider this stock as a defensive play as BCA provide least downside risk both from fundamental and share prices perspectives during global market uncertainty. We believe BCA will continue to deliver satisfying investment return over a longer term period. Our TP of 8250 reflects 4.2x 2012 PBV and 18x 2012 PE (WACC 13.4%, 26% ROE, 11% growth

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