BMRI’s expertise in corporate lending business is now complemented by its solid retail banking business. In 2Q12, Retail banking, which is comprised by consumer and business banking, and micro lending, have expanded at faster pace (+33% YoY) compared to the banks’ overall loan (26.6% YoY) 2Q12. Micro and retail are the the bank’s new proﬁ t generator with 29.6% contribution to net interest income while posting an outstanding 40.6% YoY loan growth (28.4% YoY small business loan, 77.6% YoY micro loan) in 2Q12.
Higher interest rate charged to micro borrower would lift the bank’s asset yield, in our view. To note, BMRI charged between 14.4% and 24% ﬂ at rate pa (median effective interest rate of 32.1%), much higher than its average loan yield of 11.5% in 2Q12. We are with the view that the bank’s NIM would rise further as we expect LDR would rise, and the bank’s asset mix will improve to yield higher interest income.
Selling Recap bond to enhance asset yield
BMRI’s proﬁ tability in the last four quarters has been hampered by lower yield on variable-rate bonds. NIM declined from 5.3% in 2010 to 5.1% in 2011, inline with the decline of average variable-rate bonds yield from 6.6% (SBI) in 2010 to 5% (SPN) in 2011. To note, YTD SPN average yield is 3.3%. As part of the bank’s effort to boost its asset yield, BMRI has recently sold Rp1.8tr variable-rate recap bond in a debt-swap agreement with Standard Chartered Bank, valued at USD250mn. With BMRI’s average USD loan interest at 5% in 2Q12, we estimate that the debt swap deal could potentially generate around 1% increase in yield (current 3-month SBN yield is at 4%).
Maintain BUY, upgrade TP to Rp9,800
We increase our earnings estimate for 2012 and 2013 by 4.9% and 3.4%, respectively, due to higher non-interest income and lower cost of credit. BMRI is currently trading at 2012E-2013E PBV of 2.6x -2.2x, below its 3-year average trailing PBV of 2.9x. We believe BMRI’s valuation should improve due to 1) improving proﬁtability coming from higher-yielding loans, 2) lower impact from recap bond margin pressure, and 3) improving asset quality marked by lower NPL. Therefore, we upgrade our target price (TP) to Rp9,800 as we roll-over our valuation to 2013, implying 2013E PBV of 2.75x and 2013E PE of 13.2x. With 23.3% upside pote.