BPD Jawa Barat & Banten - Growing through loans TP 1500 - MACQUARIE RESEARCH

Event
§ We lower our non-interest income contribution and increase our loan growth assumptions based on 1Q11 results and our recent conversation with the bank's management. We maintain our Outperform recommendation on Bank Jabar as the bank continues to focus on increasing its LDR and trades at an undemanding valuation. We maintain our target price at Rp1,500.

Impact
§ Higher loan growth expected. We increase our loan growth assumption to 25% YoY for this year from 18% YoY previously as 1Q11 loans grew 25% YoY to Rp24.7tr; this was mainly helped by strong micro and consumer loan growth. Micro loans grew 6% QoQ in 1Q11, helped by outsourced selling agents. Meanwhile, the bank has extended its civil servant salary loan term and ceiling, which helped consumer loans to grow 5% QoQ in 1Q11. We believe there is still upside potential to FY11 loan growth as the company has set a more optimistic loan growth target of 30% for this year.
§ NIM expected to bounce back by end of FY11. The bank is targeting a flat NIM of 7.3% by the end of this year – a recovery from 6.5% in 1Q11 – mainly through increasing its LDR. We believe this is achievable as the LDR reached 74% as of May from 70% by the end of 1Q11, based on our conversation with management. Meanwhile, the bank is committed to focusing more on its better yielding micro loans and slowing down its commercial loan growth. This was evident in its 1Q11 result, where micro loans grew 6% QoQ while commercial loans only grew 2% QoQ. Note that micro loans offer the highest effective interest rate of 25% pa vs 14% pa for commercial and 16-21% pa for consumer.
§ Non-interest income contribution to remain stable. Fee based income contributed about 90% to non-interest income, driven mainly by local remittances. Thus, considering the bank's focus on growing its loan book, we believe contribution of non-interest income to total income will remain stable. Hence, we have lowered our estimate for non-interest income contribution to total income, from 13% previously to 9% in FY11E.

Earnings and target price revision
§ FY11E and FY12E EPS adjusted by -3% and 2%, respectively, on the back of lower non-interest income contribution partially offset by higher loan growth assumptions based on 1Q11 results. We maintain our TP at Rp1,500.

Price catalyst
§ 12-month price target: Rp1,500 based on Gordon growth model.
§ Catalyst: Higher loan growth, higher NIM and lower NPL

Action and recommendation
§ Maintain Outperform. The stock is currently trading at 11.3x 2011E PER and 2.1x 2011E P/BV, which is undemanding compared to the sector valuation of 15.7x 2011E PER and 3.4x 2011E P/BV.