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Wednesday, December 7, 2011

PT. Bank Negara Indonesia. Tbk - Welcoming a New Growth Era

by Trimegah Securities

Asset Quality Problem is a Thing of the Past BNI management confidently stated that its asset quality problem is a thing of the past. The bank’s performance has affirmed such confidence, given that NPL has shown adequate improvement across all segments, with the exception of Small segment. On an absolute basis, the NPL stands flat at Rp5.9tr while special mention loans fell by Rp87bn QoQ to Rp6.4tr. We expect manageable asset quality coupled with stronger loans growth will bring down NPL by another 30bps QoQ to ~3.5% in 4Q11. The CBRO (Business Risk Officer), which was formed with functions to guide/manage quality of growth, seems to run effectively with the stagnation of NPL figures and Rp1.5tr in total loan recovery. This new division is expected to yield better balance between growth and asset quality, hence securing profitability going forward.

Strong Growth Pushes Margin Forward

With manageable/improved asset quality, management proceeded to redirect focus on growth. BNI recorded loans growth of 5.1% QoQ as corporate and consumer loans grew 7.3% QoQ and 5.3% QoQ respectively.

We expect such growth will continue along with the industry average and NIM to remain stable at ~6.0%, while BBNI - PT Bank Negara Indonesia (Persero), Tbk.

ROE will rise to 16% - 17% in 2012 – 2013. LDR, which has reached statutory limit of 78%, should also improve, with the release of some liquidity formerly tied to additional reserve requirement in line with the revised RR-LDR regulation.

Strong Pricing Power in a Competitive Setting

We believe BNI’s average cost of fund of ~3.6% is its strongest advantage in a highly competitive environment going forward. With the second lowest cost of fund in the industry, BNI will afford a strong pricing power in the loans market, favorable ammunition to boost growth further. However, as stated in TRIM Bank Book: High Growth Era, we expect the sector to be challenged by higher competition in the funding side. The first sign of this impending environment is reflected on BCA management’s decision to increase limits on TD rates. And we believe, BNI as the fourth largest banks in the market, cannot escape the competitive pressure in the future. Hence, we expect its cost of fund to inch up to 3.9%. Despite expectations for rising cost of fund, we believe BNI margin expansion will be continued as it will subsequently penetrate deeper into the loans market.

Maintain BUY, TP of 5100

We maintain BNI as one of our top picks in the banking sector with TP of 5100, or reflecting 2.2x 2012 PBV and 14.7x 2012 (WACC 13.8%, 18% ROE, 11% growth).

We expect its restarting growth story to continue and re-rating will ultimately follow as current valuation of 1.8x 2012 PBV factors in a discount compared to 2.9x 2012 PBV average of our TRIM Banks Universe. Compelling valuation along with decreasing execution risk and stronger loans growth will become the key drivers for this stock’s price performance.

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