BBNI: More money to lend out - Mandiri Sekuritas

BBNI’s performance remained solid in FY10 thanks to strong recovery of written-off assets. We see at least 2 positive catalysts for the bank’s performance this year (1) lower tax rate as the bank managed to raise its public shareholding to 40% and (2) higher loan growth post rights issue. We therefore maintained our buy recommendation on the stock, which offer 23.3% upside potential from the current share price.

Benefited from high recovery of written-off loans. In FY10 BBNI recorded strong recovery of its written-off assets of Rp2.2tn, which consisted of Rp1.8tn recovery of written-off assets before 2010 and Rp358bn recovery of written-off loans in 2010. Until Dec10, the total recovery was approximately 15-20% (total written-off assets until Dec 2010 was around Rp30tn, Rp9tn of which occurred during 2008-2010 under the new management). The bank expects to recover at least Rp2.2tn of such assets this year.

.. while coverage ratio remained sound. Despite its success to recover written-off loans, the state-owned lender still allocated significant provision expenses for impairment losses of Rp3.9tn in FY10, thus bringing the accumulated allowance to Rp7.0 tn at end Dec10. Most of the allowance belong to individual impairment, in line with the bank’s high exposure to corporate and medium-size segment (around 54% of total loans at end 2010). It is worth noting that NPL from these two segments represented 73.5% of the total NPL recorded by the bank in 2010. The bank’s aggressive provisioning policy enabled it to maintain strong coverage ratio of 120.6% at end 2010 (from 120.1% at end 2009).

To boost loan thanks to stronger capital. Post rights issue, the bank’s CAR strengthened to 18.6% at end 2010 from 13.8% at end 2009. This allowed higher loan growth this year of 17-20%, significant increase from 12.8% in 2010. The highest growth will still be expected on the consumer segment (24-27%) followed by corporate (19-22%) and SME (12-15%). It is worth noting that in 2010, the banks’ exposure to the medium sector fell by 11.1% yoy, bringing its contribution to total loans down to 17.9% at end 2010 from 22.7% at end 2009.

Buy recommendation is maintained. We expect the bank’s net profit to grow by 34% yoy, supported by higher loan growth and lower tax rate. Risk to our forecast is lower recovery from written-off assets. We assume Rp1.0tn recovery from written- off assets (vs management’s targets of minimum Rp2.2tn). At the current price, the stock offers 23.3% upside potential. Maintain buy.