BBTN:Challenges remain - Mandiri

Even though FY10 results look encouraging, we remain concerned with the bank’s funding and possible decline in NIM in the future. However, our concerns seem to have been reflected on the current share price. We therefore upgraded our recommendation from sell to neutral.

Slower loan growth... BBTN reported slower loan growth of 26.6% yoy in 2010 compared with 32.4% yoy in 2009 and 41.2% yoy in 2008. This was particularly due to lower growth in subsidized mortgage of 13.2% yoy vs non-subsidized mortgage of 26.9% yoy. The delay in the implementation of new subsidized loan scheme was claimed to be the reason behind such slower growth in the subsidized mortgage. The new scheme was just implemented in Oct10, whereby of the total Rp2.7tn of funds provided by the government, BBTN was only able to utilize Rp600bn, or translating into Rp1tn of new subsidized mortgage in 2010. This year, the bank targets to disburse around Rp6tn of subsidized mortgage (+27.1% yoy).

Concerns on funding remains… Although total deposits grew by 18.2% yoy in 2010, the bank’s CASA growth remained flat. This affirmed our previous argument that finding low cost funding would remain a challenge for the bank. However, thanks to the low interest rate environment presently, the bank managed to improve its NIM to 5.9% in FY10 from 4.7% in FY09. Nonetheless, with the possibility of higher interest rate this year, the challenge for BBTN will be bigger. Despite projected improvement in liquidity as the government is expected to place around Rp3.6tn of funds to support subsidized mortgage, the bank’s margin will likely narrow as this new subsidized mortgage will only give around 4.25% margin. We therefore expect, the bank’s NIM to fall to 5.4% this year.

No more reversal expected. The bank recorded income from recovery of loans written-off amounting to Rp78.6bn in FY10. Despite that, net impairment expenses was still high at Rp331.8bn in FY10 compared with Rp64.2bn in FY09 as the bank had to write off around Rp100bn of bad assets in 2010. We do not expect any significant write-off to occur this year, hence lower impairment expenses of Rp211.8 bn in FY11F is expected.

Upgraded to neutral. We maintain our net profit forecast for FY11F thus our TP of Rp1,600/share. Risks to our forecast are: (1) the bank (again) recorded recovery on loans written-off and (2) higher gain on marketable securities. Both factors were the reasons behind the better-than- expected FY10 results. Meanwhile, we believe that our concerns have been fully reflected on the current share price. Therefore, we upgraded our recommendation from buy to neutral.