It is a given that BTN is the most liability sensitive bank in our Indonesian bank coverage universe. 88% of the banks revenues are tied to spread revenue and the liability sensitive balance sheet will suffer if rates increase, but the suffering will be less than historical.
THIS IS WHY:
1) The new liquidity facility provides a neutral spread for the banks subsidized mortgage business, as the earning assets are match funded against the governments liquidity facility and the banks senior debt issuance. Subsidized mortgages are 59% of the total mortgage book, and the government provided liquidity facility continues to increase annually.
2) Post Dec '09 IPO, total equity is now 10% of earning assets vs. 7% in 1Q09. This implies that the bank will have less asset sensitivity as interest bearing liabilities represent a smaller portion of the overall balance sheet.
3) The bank has maintained its nonsubsidized mortgage rates north of 11%, and has not been aggressive in offering teaser rates, aside from a massive rate hike, we expect only a marginal impact on new mortgage origination.
4) the subsidized mortgage portfolio should continue to increase, the bank has been conservative in its senior debt estimates (funding source), and even with a rate hike should still be able to raise debt in the spring at a rate in line with or below their 2010 funding cost of 10.65%.
5) Lower expenses and improving credit quality are two drivers that can not be ignored. The bank has implemented new technology that is employed by HDFC in India which should help improve credit quality, this will any impact on volume and rates.
SHARES ARE TRADING AT PE and PBV of 10x and 1.8x 11CL estimates, representing a discount to the group of 18% on PE and 44% on PBV. Most thrift like institutions trade on PBV multiples. This discount is excessive in our view.
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