Banking sector update: BBNI 2Q11 Result Round-ups Rock-solid core earnings - Bahana

2Q11: Core earnings supported net profit growth
Indonesian banks under our coverage reported 2Q11 results, which were slightly above market consensus, but in line with our estimates. Exhibit 14 shows 22.7% y-y loan growth while third party funding grew at a slower pace, raising LDR to 77.6% in 2Q11 from 71.9% in 2Q10. This combined with improved NPLs to 2.5% from 2.7% boosted bottom line growth to 38.7% y-y. However, this 2Q11 growth performance was lower than 1Q11’s level mainly on lack of major debt recoveries. On the margin side, 2Q11 NIM rose to 7.1% from 6.7% 2Q10 due to sticky funding costs while loans were re-priced to reflect the 25bp hike in February’s BI rate.

2012: Support from core earnings to persist
Supported by strong GDP growth, contained inflation and stable currency, we see that loans are likely to continue growing at above 20% in 2011-12. However, competition in bank lending will undoubtedly continue to intensify, as most big banks are well capitalized and flushed with liquidity. However, banks with competitive funding costs and/or market niche should be able to maintain their competitive advantage, and continue to outperform. We note that 2012 banks’ EPS growth of 16% y-y, down compared to 2011’s level of 24% y-y growth, is mainly supported by core earnings rather than non-recurring incomes arising from NPL recoveries.

Upgrade to Overweight with BBCA, BBRI and BBNI as top picks
With the government’s plan to retain fuel subsidies, concerns over inflation is no longer an issue, particularly as ytd inflation only reached 1.73% with y-y growth of 4.52%. With our economist cutting Bahana’s 2011 inflation target to 4.9%, we upgrade our banking sector rating to OVERWEIGHT from Neutral. Despite the recent rallies in banks’ share prices, we believe the sector remains attractive, particularly as we roll over our valuation using 2012 outlook. Our new target prices can be seen in exhibit 1. At the moment, BBCA, BBRI and BBNI are our new top sector picks.
§ BBCA’s extreme competitive funding structure with CASA of 77% will mean enhanced profitability as the bank shifts into higher gear in bank lending. BBCA’s current premium valuation, which we expect to be sustainable, is warranted given solid 25% ROAE in the past few years coupled with sound assets quality with NPLs of less than 1%.
§ On BBRI, its stranglehold in micro financing translates to a competitive edge, allowing faster growth versus the industry (exhibit 14). Going forward, we believe this micro segment has ample room to grow coming from both existing and untapped markets. Lower Risk Weighted Assets for micro financing, down to 75% from 85%, has supported BBRI’s CAR.
Following lower NPL of 4% in 2Q11 from 4.3% in 2Q10, BBNI should see acceleration in its 2012 loan growth, aiming mainly at corporate and consumer segments. Apart from BBNI’s strong franchise, we like its compelling valuation of 2012 P/BV of 2.5x, 30% discount to the sector.