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Monday, December 12, 2011

Bank Rakyat Indonesia - Micro Loans Wonder

by Trimegah Securities

Self Sustaining, Resilient Growth of Micro Loans

BRI delivered 4.0% QoQ loans growth as corporate and micro loans contribute 76% of the total growth. We believe micro loans are now even more important for BRI in order to sustain its profitability and growth profile in the face of global market uncertainty. Contrary to common belief, BRI has successfully proven that micro loans are generally resilient in crisis environment and could fund itself. BRI micro loans products continued to grow at 29% - 30% in the midst of 2009 global economic meltdown, while NPL remained stable at <2.0%. Its new Teras BRI has also become an overnight success with current operation of 1195 branches. Teras BRI was developed from scratch in 3Q09 and BRI’s unbeatable knowledge and experience in micro banking proved to be a critical advantage in supporting growth of this new channel. The aggressive development of Teras BRI has proofed to massively impact its competitor growth as BRI’s strong human capital, management experience, and brands show its strength.
Waiting for Capital Enhancement

BRI total CAR ratio of 13.4% in 3Q11 is only adequate to support growth at par with the industry average. BRI’s capital restriction, we believe, will soon improve as IFRS implementation takes into effect. Capital enhancement will come from two main sources (1) micro loans RWA weighting scale pulling back to 75% vs. 85% currently applicable (2) new Bank Indonesia regulation PBI 13/1/2011 on self risk assessment, which should induce a new trend of easing LLP expense/coverage in the banking sector or even writing back previous reserves. BRI, with its Rp18tr total reserves and 32% micro loans portfolio, should become one the main beneficiaries of this accounting regime changes. Decreasing RWA weight on micro loans should boost CAR ratio by 40bps.

Human Capital for Sustainable Growth

BRI places a strong emphasis on human capital development. We like the fact that 49% of its employees is between 20 – 30 years old and management aggressively recruits future leaders. BRI has doubled its employee recruitment efforts to (approximately) ~1000 new employees per annum since 2007. The figures show that BRI can continue to deliver strong performance going forward as younger bankers become more competent through experience. Continuous development is also reflected in the bank’s overall human capital management, comprising of in-house training, external training, and scholarships for higher education opportunities at top universities in the US, UK, or Australia. The bank offers employee benefits that also include performance-based bonus, customization of salary package between business and supporting units, and unlimited health coverage. Such superior compensation package, along with high management attention to sustainable personal development has significantly contributed to/supported its well-known low employee turnover ratio. We believe this is important to secure BRI’s competitive advantage going forward, particularly since banking is a people-oriented business, hence highly sensitive to HR dynamics.

Maintain BUY, TP of 7750

We maintain our Buy call for BRI with TP of 7750, reflecting 3.9x 2012 PBV and 14.8x 2012 PE (WACC 13.4%, 26% ROE, 12% growth). We like the prospect of this stock in 2012 as its high margin micro loans business continues to generate strong growth potential through network expansion, capital enhancement pending adoption of new accounting policies, and sustainable human capital programs.

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