NOMURA Global Market Research
Indonesia strategy: Outlook 2016 – Time for the big push
Release Date: December 10 2015
Risk from government intervention
Keep an eye out on government actions in micro loans
We have a Buy rating for BRI as the stock is inexpensive, and we believe the stock should react positively to potential interest rate cuts in 1Q 2016. A rate cut would be especially helpful in driving its micro-finance business.
Investors like this stock because of the strong loan growth in its micro-finance business, which makes up about 33% of the loan portfolio. While we are relatively sanguine about the loan growth in this business, we are however concerned about the potential for the government to flood the market with the subsidised micro finance (KUR) loans. The bank thinks that if this was to take place it could hurt the lending rates of non-subsidised micro loans. Currently only about 5% of its loans are KUR loans. We estimate the difference between the current lending rates of KUR and non-subsidised micro loans is approx.
10 ppt. We estimate for every 1ppt of lower lending rate for the non-subsidised micro loans, net interest income could be 2.9% lower in 2016.
Provisioning could remain high in 1H 2016
Provisioning in 3Q 2015 was up 87% y-y and we believe the high provisioning could continue into 1H 2016 as the bank would be keen to build up its coverage ratio in anticipation of a potential deterioration in asset quality. In 3Q 2015, while most sector NPLs and special mention loans were stable (q-q), the restructured loans rose to IDR 17 trillion, from IDR 15 trillion. The bank indicated that asset quality could remain an issue for some time and it remains concerned about commodities.
We revise our price target to IDR 12,643 from IDR 11,912 as we roll over our 12-month book value. Our target price is based on the Gordon Growth Model, with the key assumptions being ROE of 22.5% and COE of 16.5%.