Bank Tabungan Negara - Earnings and TP downgrades post 1H11 results - Deutsche Bank

We have lowered our earnings projections for BTN by 8-9% in 2011-13F to reflect mainly higher provision charges post its 1H11 results. in 2Q11, the bank booked a 30bps increase in NPLs to 4.4%. Most of the NPL increase is coming from subsidised mortgages, where NPL reached 5.11% (from 3.8% in 2010 and 4.7% in 1Q11). The bank argued that the increase in NPL is reflecting repricing in older subsidised mortgage lending rates as interest rates for many of these loans are no longer subsidised by the government.

Recall, under the older mortgage subsidy scheme, customers enjoying subsidised rates for the first five to six years, then they will have to pay market rates. During 2Q11, there have been some rate adjustments; but customers have not yet adjusted their installments for higher rates. As a result, there is a shortfall in their installments resulting into their loans being downgraded into NPLs. Given there will be more of older subsidised mortgages having their lending rates adjusted upwards, we have raised our credit cost assumptions by approx 20-25bps to 93-95bps of loans in 2011-13F.

Post our earnings adjustments, implied ROAEs are down by 100-130bps to 15.2% in 2011F, 17.1% in 2012F and 17.6% in 2012F. CARs too are approx 30bps lower than previous forecasts to 19.1% in 2011F, 16.9% in 2012F and 15.3% in 2013F - still a healthy level of CAR. with the adjustments, we revised down our target price to Rp2,000 (from Rp2,175) - implying a 2.2x 12F book and 13.7x 12F earnings.