Bank Central Asia; Shift in liquid asset investments positive to topline; Hold; Rp7,600; TP Rp7,100; BBCA IJ - DBS Vickers

at a Glance
· 1Q11 net profit was within expectations even though it comprised 21% of our and consensus estimates. Traditionally 1Q is a slower quarter.
· Shift in its liquid assets composition ensured that NIM and net interest income remained on an uptrend.
· No change to our estimates. Maintain Hold and Rp7,100 TP

Comment on Results
Net profit of Rp2.0bn was driven by net interest income as NIM expanded. Although the decline in lending yields outpaced cost of funds, BBCA’s net interest income was higher as it shifted its liquid assets from SBI (held in trading accounts) to higher-yielding BI term deposits. This shifted revenues from non-interest income (which declined) to net interest income. Under PSAK 50/55, income from SBI held in the trading account is recognized as non-interest income. Pre-provision profits were lower due to higher expenses to support business expansion. Asset quality remained resilient with NPL ratio at 0.6%. Loans contracted due to business cyclicality – corporate and commercial/SME loans shrank by 7%/3% q-o-q respectively. Consumer loans remained strong growing at 6% q-o-q of which mortgages being the mainstay (comprising 50% of total consumer loans). Total deposits declined with lower time deposits despite continued growth in CASA. CASA to total deposits stood at 77% in 1Q11. Capital improved after taking into account previous year’s profits bringing total CAR to 14.8%.

Recommendation
BBCA remains Indonesia ’s premium bank with a solid deposit and transactional banking franchise. However, valuations remain dear at 4.8x FY11 P/BV. Maintain Hold and TP at Rp7,100 based on the Gordon Growth Model (26% sustainable ROE, 11% growth, and 14% cost of equity). Our target price is equivalent to 4.6x FY11 P/BV and 18.5x FY11 PE. Downside risks relate to NIM, which is already low, further exacerbated by competitive pressures as well as its reluctance to gear up its balance sheet for growth in order to protect asset quality, and its low loan-to-deposit ratio, which could drag ROEs.