Banking: 9M16 Results - On the Road to Recovery?
- Banks' average profit growth improved to 4% y-y in 9M16 from +1% y-y in 6M16, but loan and deposit growth remained weak at +9% y-y and +6% y-y respectively. NIM improved to 6.7% while NPL reached 3.0% with signs of peak. Trading at 1.6x P/BV 2017, we keep our Neutral sector call with $BBRI, $BBTN and $BNGA as top picks.
- Average net profit growth of 4% y-y in 9M16. The 12 banks under our result universe show improving profit growth from the previous quarter given the high losses incurred by $BNLI in 1Q and 2Q16. The results were in line with expectations, accounting 73% of the consensus’ full year targets. $BMRI, $BBTN, and $BJBR posted below expectations, while $PNBN, $BJTM and $BNGA above. $BNLI continued to record losses in 9M16 on its rising NPL level. At the PPOP level, average growth was a decent 18% y-y as banks had a better management on operating costs.
- Loan growth slowed down to 9% y-y. The industry indicates +6.4% y-y loan growth in September while some of the banks in our universe managed to record much higher loan growth; BBNI (+21% y-y) is on corporate/infrastructure loans, BBRI (+16% y-y) on corporate and micro loans, while $BBTN (+17% y-y) on housing loans. Over the past one year, more loans have been channeled into corporate (especially state companies) and micro segments, at the expense of SME commercial and consumer loan segments. Of the 12 banks, three ($BDMN, $BNGA and $BNLI) still posted negative y-y growth.
- Deposit growth also weakened to 6% y-y. Total deposit still grew at +8% y-y in June, while the 5% economic growth is not enough to generate better deposit growth. Five banks ($BDMN, $BJBR, $BJTM, $BNGA and $BNLI) still recorded negative y-y deposit growth with two of them ($BDMN and $BNLI) continued to see negative ytd growth. CASA deposits continued to gain more than time deposits, which see declining rates.
- NIM still improved to 6.7% in 9M16. In contrast to our earlier expectation, banks recorded better margin in 3Q16 as they had not lower the lending rates as much as deposits rates. While this is true in the declining rate environment, banks are also pending further reduction in view of rising need for provisioning. Average NIM reached 6.9% in 3Q16 from 6.7% in 2Q16, but this level is expected to decline in the coming quarter on pressure to reach single digit lending rates.
- NPL reaching the new peak of 3.0%. Additional problem loans are growing at a slower pace, with some banks claiming to have seen peak NPL in August. Banks like $BMRI and $BBCA still expect peak NPL in 4Q16 and continued charging high provisioning.
- Classified loans at 11.3%. Average classified loans (NPL, SML, and performing restructured loans) were at 11.2% in June and 10.9% in March 2016. This shows less pressure on asset quality while coverage/classified loans ratio improved to average 32% from 28% a year ago.
- Operating costs were well managed. The average cost/income ratio went down to 45% in 3Q16 from 48% in 2016 and 47% in 3Q15. Of the banks, $PNBN, $BNGA, and $BDMN showed the best cost/income ratio improvement.
- Maintain Neutral. We will wait for stronger support for improving NPL and hence keep our Neutral call for the stock, which trades at 1.6x P/BV 2017. Our top picks are $BBRI, $BBTN and $BNGA.