BBTN: Not all is well yet - Mandiri

We maintained our FY11 forecast for BTN even though there is a possibility that 2H results would be better than the 1H. The reasons are (1) possible lower earning asset yield as the bank still has VR bonds whose rates have declined sharply and (2) higher cost of funds should BI increase its benchmark rate in the 2H. Rolling valuation into 2012 led us to upgrade our TP from Rp1,600/share previously to Rp1,800share. Yet, the upside potential is still limited. Maintain neutral.

Lower-than-expected loan growth. BBTN reported lower-than-expected loan growth in 1H11 (+21.5% yoy), below the management’s target of 27.0% yoy. This was partly due to lower disbursement of subsidized mortgage after the implementation of FLPP (liquidity scheme facilities). The bank only managed to book mortgage for 40,360 units of houses (from the target of 120,000 units this year). Despite that, subsidized mortgage still contributed 46% of total loans as of end Jun11.

Increase in NPL was only seasonal. The bank’s NPL increased to 4.4% at end Jun11 from 4.0% at end Mar11. Yet, the management claimed that it was only seasonal, expecting it to decline to 3% at the end of this year. It is worth noting that NPL from subsidized mortgage remained high at 5.1% at end Jun11, one of the culprits behind the flat interest income during the quarter (+1.7% qoq).

High reliance on TD caused a spike in interest expenses. Since last year, BBTN has been quite aggressive in opening cash offices. At end Jun11, total cash offices reached 249, which was able to generate Rp1.2tn of low-cost funds (CASA). Despite that, TD still accounted for most of the total deposits or 64% at end Jun11. Coupled with repricing as a result of higher BI rate, the bank experienced a significant increase in interest expense of 7.4% qoq, thus causing net interest income to fall by 4.3% qoq.

Forecast maintained. During the recent analyst meeting, the management stated their confidence that BBTN 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 on the bank (1) lower earning asset yield as the bank still has Rp6.3tn VR bonds whose rates have declined sharply (in the last auction, the yield on the 3-month SPN as the benchmark rate for VR bonds was reported at 4.18%), (2) additional increase in cost of funds should BI increase its benchmark rate in the 2H. We therefore prefer to maintain our current FY11 net profit forecast of Rp971bn.