BBRI:Shifting to low gear - Mandiri

We like the bank’s move to slow its loan growth this year considering its relatively low CAR and high LDR. Yet, it is worth noting that the loan mix has improved more toward higher yielding assets. Rolling valuation into 2012F caused us to upgrade our TP for the bank from Rp6,750/share previously to Rp8,100/share, thus upgraded our recommendation from neutral to buy.

Changes in forecast, upgraded to buy … BBRI’s 1H11 results came above our expectation. The bank reported higher-than-expected pre-provision profit, which we believe was a result of changes in interest income recognition post PSAK 50/55 implementation. We therefore adjusted up our forecast by 12% and 9% for FY11 and FY12, respectively. Furthermore, rolling our valuation into 2012F led us to upgrade our TP to Rp8,100/share from previously Rp6,750/share., which offers 11.7% potential upside from the current share price.

Highlight from 1H11 results: Loan growth was slow.. Even though BBRI’s loans grew quite strong at 6.5% qoq in 1Q11, the annual growth was still low at 18.8% yoy, the lowest in the past four years. We like the management’s move to slow its loan growth due to two factors (1) the bank’s relatively lower CAR compared with other large banks and (2) the bank’s high LDR position of 90.1%; which implied that a focus toward stronger liquidity will be more important given the current economic conditions. We expect the bank to book 19% yoy loan growth this year and 20% yoy next year.

… yet, loan mix improved. Yet, it is worth noting that micro loans still grew very strong at 31.5% yoy in Jun11, which was not only extended through the bank’s conventional micro units but also through BRI Teras. BBRI has been aggressively penetrating the traditional market through these BRI Teras which reached 929 units at end Jun11. Since it was launched in 2009, the loan growth through BRI Teras was quite astonishing, reaching Rp1.8tn at end Jun11. With such strong growth in micro loans, the contribution of micro loans to total loans expanded from 27.1% at end Jun10 to 31.5% at end Jun11.

While the increase in NPL is believed to be seasonal. The bank’s NPL worsened to 3.6% at end Jun11 from 3.1% at end Mar11. Yet, we believe this would be seasonal. The bank’s NPL will reach its peak in 3Q before going down at the end of the year. NPL from medium and small commercial segment remains a concern (=7.9% at end Jun11), yet in term of absolute amount, it actually dropped from Rp6.4tn at end Jun10 to Rp6.0tn at end Jun11. BBRI has initiated several efforts to deal with this NPL, including accelerating loan collections and loan restructuring as well as seizing the collaterals. We expect NPL to reach 3.0% by end 2011 and 2.6% at end 2012.