Bank Rakyat Indonesia; A strong quarter; Buy; Rp6,550; TP Rp7,700; BBRI IJ - DBS Vickers

At a Glance
· 1Q11 net profit made up 24%/26% of our and consensus estimates
· NPL ratio rose marginally as BBRI took pre-emptive classifications on the small commercial loans
· Dividend policy is set at 20% as approved at the AGM on 28 Apr 2011.
· Maintain Buy and Rp7,700 TP. BBRI is our top pick.

Comment on Results
1Q11 net profit of Rp3.3trn was within expectations. All P/L items were lower q-o-q. Y-o-y items were not comparable as BBRI did not restate 1Q10 numbers in accordance to PSAK 50/55. Net interest income was lower in 1Q11 after taking into account a large chunk of PSAK 50/55 adjustments in 4Q10 of Rp4.5trn vs Rp600bn in 1Q11. Excluding these, NIM would have been relatively stable. Expenses also normalized in 1Q. Loans grew by 2% q-o-q in a seasonally slow quarter. Deposits declined significantly as BBRI had disbursed the State Budget Fund (via Treasury Single Account) during the quarter. Loan-to-deposit ratio normalized to 85%. NPL ratio rose marginally as BBRI took pre-emptive classifications on the small commercial loans Total CAR rose to 15.6% after taking into account previous year’s profits. BBRI’s AGM approved a dividend policy of 20%, which is lower than the previous year of 35%. We view this positively as BBRI would not need to gear up in the near term.

BBRI acquired a small remittance business in Hong Kong for Rp3bn. While shareholders approval is technically not required, BBRI will proceed to obtain such approvals in the spirit of good corporate governance. The business, which is ultimately owned by BRI Pension Fund, is relatively small but expected to take advantage of the vast 2m Indonesian migrant workers regionally.

Recommendation
Maintain Buy and Rp7,700 TP. Our TP is based on the Gordon Growth Model with the following assumptions: 30% sustainable ROE, 11% growth, and 15% cost of equity, implying 3.9x FY11F P/BV and 13.6x FY11 PE. We remain bullish on BBRI’s growth prospects as Indonesia ’s leading micro lender. NIM will decline mainly due to rising cost of funds, but ROE will remain robust at above 30%. BBRI is our top pick among the Indonesian banks.