Deutsche Bank Bank BJB Alert : Expanding reach into rural areas through acquisition of BPR

Bank BJB (BJB) plans to increase its stakes from 15% to at least 50% in 50 rural banks (BPR) in the West Java and Banten regions. Other shareholders of BPR are West Java regencies (50%) and provincial government (35%). The bank has allocated Rp240-300bn to be injected into these BPR. BJB intends to use these BPR to expand its reach into micro loans, which currently stands at 7% of its existing loan book.
 
According to BJB, the asset size of these rural banks range from Rp50bn to Rp90bn. Assuming an average asset size of Rp70bn, the combined asset base of these 50 BPR would be Rp3.5tr - representing 8% of BJB's existing asset base. We see the transaction as neutral given some challenges that the bank may face. In addition to resource limitations, the integration process could take some time.
 
Separately, the bank has provided some guidance on its 2010 performance which are slightly ahead of our forecasts. Loans grew by 30% to Rp24tr, while deposits were at Rp32tr (+35% yoy). Into 2011, BJB targets loan
growth of 30% vs DB's 25%.
 
Despite concerns over rising inflation (and interest rates), we reiterate our Buy rating. Within the small banking space, BJB is one of the primary beneficiaries of higher rates. Its relatively large excess liquidity (and captive deposit taking from regional government and civil servants) should allow the bank to maintain robust growth.