BBRI Micro lending still the key - BNP Paribas

ƒ BRI continues to increase micro lending activity
ƒ We expect NPL to decline in 4Q11
ƒ BRI's 2011E ROE of 30% is the highest in our bank universe
ƒ We raise TP to IDR8,000, maintain BUY

Increases micro lending further
Bank Rakyat (BRI) has guided to increase micro lending, which accounted for 31.6%
of total loans as at June 2011, up from 27.4% a year ago. Its exposure to
corporate lending has reached 19.9% of total loans, close to its limit of 20%. Total loans increased 19% y-y in June 2011 with micro loans up 37% y-y and
corporate loans up 24%. Loans to small enterprises grew 2% y-y but those to
medium enterprises fell 7% y-y. This loan composition helped improve net interest
margin (NIM) to 9.8% in 2Q11, from 8.8% in 1Q11, with cumulative NIM of 9.2% in 1H11 vs. 9.4% in 1H10.

NPL to decline in 4Q11E
Non-performing loans (NPLs) increased to 3.6% in June, from 3.1% in March, due to rising problem loans in the corporate, medium and small commercial segments. Management indicated that the bank expects NPL to rise further in 3Q11 but should drop in 4Q11. We believe this can be achieved through write-offs and improvement in some of the problem loans. This cycle was similar to the one recorded in 2009 and 2010. BRI wrote-off IDR2.5t in 2009 and IDR5.0t in 2010, representing 1.2% and
2.0% of the year-end outstanding loans. Meanwhile, NPL in micro lending is now at 1.6%, up from 1.5% in March 2011. Given the track record, we do not expect NPL in micro loans to surpass 2%, the level which was last recorded in 2005.

ROE remains the highest in our bank universe
Supported by high NIM and managed operating costs, we expect BRI to maintain its high ROE of 31.9% in 2011 and 30.5% in 2012. Although this level may not be sustainable in the long term, we believe BRI will still record one of the highest ROEs in our sector universe, at 28-30% in the next three years.

TP raised to IDR8,000, maintain BUY
We raise our EPS forecasts by 2% for 2011 and 3% for 2012, on the back of a slight change in loan composition towards micro lending, resulting in higher margins and lower provisioning charges. Rolling over our valuation base to 2012E, we adjust our TP to IDR8,000 (IDR7,300 previously), valuing the stock at a target 3.3x P/B (using GGM model, which assumes ROE of 26.5%, cost of capital 12.5% and growth rate 6.5%). Risk to our TP is a rapid increase in interest rate, which may affect asset quality