Bank Tabungan Negara: 1H11 results 49% of ours and 48% of consensus estimates (BBTN, Rp1,770, Neutral, Rp1,600) - Mandiri

􀂄 BTN recorded a net profit of Rp480bn (+13.7% yoy) in 1H11, which was inline with our expectation and consensus estimates
􀂄 Despite that, the bank actually recorded higher than expected operating expenses which mostly be derived from the bank’s network expansion in 1H11. The bank targets to open 200 cash offices this year and until Jun11 it managed to open 149 cash offices. This has led to a higher Cost to Income Ratio (CIR) of 63.7% in 1H11 (from 56.1% in 1H10). So far, these cash offices (totaled 249 outlets) were able to generate around Rp1.2 tn of low cost deposits (CASA).
􀂄 During the analyst meeting yesterday, the management stated their confidence that BTN will be able to achieve its net profit target of Rp1.1 tn this year as 2H is usually stronger than the 1H (last year, 1H results represented 46% of FY10). Even though we buy this argument, we still see two risks attached to this bank (1) lower earning asset yield as the bank still had Rp7 tn variable rate bonds whose rates have declined sharply (in the last auction, the yield on 3 month SPN as the benchmark rate for VR bonds was reported at 4.18%), (2) higher cost of funds should BI increase its benchmark rates in the 2H (note that the bank still relied heavily on TD. At end Jun11, TD accounted for 64% of total deposits). We therefore prefer to maintain our current FY11 net profit forecast of Rp971bn.
􀂄 At present, BTN is traded at 2012F P/BV of 13.4x and PER of 2.1x. We are maintaining our neutral recommendation on the counter.