Raymond Kosasih, CFA
Stay invested with BRI; TP Rp13,300
BRI share price has outperformed Indonesia financials as well as the broader JCI by 5-11% since Jan-15. Despite this, we retain the stock as one of our top two picks in Indonesian banking sector. Of late the bank has provided more positive news. Maintain Buy with TP of Rp13,300.
KUR – Opportunities to grow micro dominance
This year, BRI targets new KUR disbursement of Rp67tr – a significant increase from approx Rp12-15tr in 2015. Despite lower KUR rate of 9.0% in 2016F, the govt has raised the interest rate subsidy for KUR to 10.0% – basically implying effective KUR rate of 19.0% (unchanged). Contrary to market belief, we see KUR as a way for the bank to grow their dominance in the micro space.
Not with standing lower loan spread for KUR than traditional micro, they are still well above spreads for other loan portfolio (approx 400bps difference except for traditional micro). Thus, changes in the bank’s loan mix towards KUR would likely keep its NIM elevated. Risks of loan losses should be covered with the insurance in place for these KURs. See our note on KUR dated 07th Sep- 2015 – KUR : More benefits than woes.
Declining NPL trends (and likely CoC) – A boost to earnings growth
BRI has guided that its NPL ratio declined to 2.0% as of Dec-15 (from a peak of 2.2% in 2Q15). Albeit this is still up 40bps yoy; BRI is perhaps one of the few banks to see its headline NPL ratios. This suggests that credit costs (CoC) are likely to be off their peak, thereby becoming main earnings drivers for banks in 2016. Indeed this is inline with our key investment thesis for Indo banks, where we have highlighted some evidence of declining credit costs. Based on our recent studies, for major banks, every 25bps lower CoC, their earnings could have been 5% higher. Thus, we think major banks like BRI will see recoveries in earning growth. So far, we have assumed a conservative CoC of 170bps in 2016F (vs 160bps in 2015F and 120bps in 2014). This is well ahead of past two months’ ave CoC of 80-90bps. If BRI’s FY16F CoC were to be 160bps, its EPS growth would have been 9%. But if it were to come back to 2014’s level of 120bps, BRI’s FY16F EPS would have been 15-16%
Life Insurance – Keeping the majority stake
BRI has recently announced cancellation of a sale of 40% stake in the recently acquired BRIngin life. Essentially the bank will retain its 90% stake in the life insurance. We believe that given BRI’s substantial customer base (abt 50m) as well as extensive distribution reach, the bank should be able to grow BRIngin Life insurance business without much help from outside partner.