BBCA:Toward the real value - Mandiri

BBCA’s FY10 results remained strong despite lower interest rate environment, thanks to correction on impairment expenses. We expect lower impairment expenses going forward in accordance with the PSAK 50-55 implementation, hence the bank’s net profit will fully reflect its operational activities. We slightly upgraded our forecast on BBCA, hence our TP to Rp7,700/share. We reiterate our buy call on the stock for it still offers 10.8% upside from the current share price.

Anomaly year ... The year 2010 looks like an extraordinary year for BBCA. The bank’s net profit usually moved in tandem with the changes in BI rates, whereas higher BI rates would lead to higher net profit and vise versa. Last year, BBCA’s net profit grew by 24.6% yoy despite a decline in BI rate from an average 7.3% to 6.5%. This was possible due to lower impairment expenses (in fact, the bank recorded correction/reversal on its earning assets’ impairment expenses during the year of Rp333bn). The PSAK 50/55 implementation is believed to reduce the bank’s ability to allocate higher than required provisioning expenses. Exhibit 2 shows that the year 2010 was the first year for BBCA to record a reversal on its impairment/provision expenses.

To apply much higher RR… For the past five years, BBCA’s loan growth actually tended to outgrow the sector. However, strong growth in total deposits caused its LDR to remain low at 55.5% at end Dec10 (far below the required LDR of 78% set by BI). Consequently, BBCA needs to allocate higher RR of 10-11% this year based on our estimate.

… yet net profit will still grow by 19.5% yoy. Despite that, net profit is still projected to grow by 19.5% yoy supported by (1) higher BI rates, which will benefit BBCA due to its high excess liquidity (2) the bank’s plan to cut its saving rate by 25 bps (total saving at end 2010 reached Rp145.6 tn, thus a saving of around Rp300-400bn in a year is expected) and (3) low impairment expenses. However, on the other hand, please also note that there is a risk of lower interest income generated from VR bonds due to changes in the reference rate of the VR bonds to the 3-month SPN yield from 3-month SBI. BBCA’s interest income could fall by Rp225bn if the 3-month SPN yield is 5%, compared with the 6.4% yielded by the 3-month SBI currently.

Upgraded TP of Rp7,700/share. We slightly upgraded our earning forecast for the bank by 3% this year, causing us to upgrade our TP to Rp7,700/share from Rp7,300/share previously. This provides 10.8% upside potential from the current share price. Maintain buy.