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Nov 18, 2016 09:49:52

Bank BRI Agroniaga ($AGRO): Company expects net profit to grow 47-53% in 2017-18

Banking: Indonesia

§ Company seeks higher growth rate from diversification: BRI Agroniaga ($AGRO), a subsidiary of Bank Rakyat Indonesia ($BBRI) that is focused on agro business funding, has diversified its lending and funding into a wider range of portfolios, hoping for higher asset growth and profitability. For now, agro-business related loans amounting to IDR4,034bn in 9M16 remain the highest contributor at 53% of total credit (exhibit 7). Given the positive CPO price outlook due to the production disruption and low global inventory level, AGRO expects the credit quality of agro-business related loans to continue to be stable.

§ BBRI’s infrastructure synergies: As BBRI has the largest infrastructure within the banking industry, AGRO expects vertical synergies with the parent company to benefit its network expansion and offer a competitive advantage relative to other small banks. For example, AGRO’s customers’ widely dispersed business sites across Indonesia could be better monitored through the use of BRIsat, BBRI’s satellite. AGRO could also benefit from BBRI’s transactional banking features such as ATM and EDC which could improve its franchise coverage as it is already providing loans to debtors that support BBRI’s customers.

§ Start of NPL recovery: In line with the banking industry’s lower NPLs and provisioning charges in 3Q16, AGRO’s NPL ratio also improved, from 3.24% in 2Q15 to 2.85% in 3Q16. Going forward, management expects the NPL ratio to improve further to 2.5% by end-2016, 2.4% in 2017 and 2.0% in 2018. AGRO booked 3Q16 provisioning charges of IDR60bn, up 7% y-y from IDR56bn in 3Q15.
 
§ Improvements in non-interest income and net-interest income in 9M16: AGRO posted a 9M16 operating profit of IDR101bn, up 40% y-y from IDR72bn in 9M15, backed by improvements in non-interest income (+53% y-y to IDR67.2bn) and net-interest income (+13% y-y to IDR295bn, partly on a lower blended cost of funds. Overall, AGRO booked 9M16 earnings of IDR82bn, up 55% y-y from IDR53bn in 9M15.

Outlook: AGRO targets 25-28% loan growth in 2017-18  
At this stage, management expects loans to reach IDR8.0tn (+32.6% y-y) in 2016, before continuing to increase to IDR10tn (+25.2% y-y) in 2017 and IDR12.8tn (+28.4% y-y) in 2018. Furthermore, management expects the loan growth to lead to total asset improvement of 32% y-y in 2016, 38.1% y-y in 2017 and 34.7% y-y in 2018F. As for net profit, management expects it to reach IDR104tn (+28.8% y-y) in 2016, before continuing to improve to IDR159tn in 2017 (+53.4% y-y) and IDR233tn in 2018 (+46.8% y-y). AGRO’s share price has increased by more than 400% in the year to date (exhibit 4). On the NIM, management expects it to reach 4.2% in 2016, down 60bps y-y, and remain at 4.2% in 2017, before increasing by 20bps to 4.4% in 2018.

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