Apr 12, 2017 12:39:33

Bank Jatim ($BJTM): Unjustified Valuation, Downgrade to REDUCE

- Second-largest regional development bank, but valuation looks stretched: Bank Pembangunan Jawa Timur ($BJTM) is the second largest regional development bank in terms of market cap (after $BJBR), owned by East Java Provincial and Municipal Governments (80% of outstanding shares); its main purpose is to provide financial services for East Java civil servants. BJTM’s share price has rallied by 21.2% in the past one month, now reaching 1.4x FY17F PBV (at 15% ROE), notably higher than its small cap bank peers’ of 0.6-1.1x PBV, and also more expensive than BBNI at 1.3x PBV. BJTM’s PBV is currently more than +2SD above its 5yr mean, which we find too expensive. As such, we downgrade our recommendation to REDUCE (from HOLD) with a new target price of IDR600.

- Low-risk payroll a majority of loan book: More than half of BJTM’s loan book was dominated by consumer loans (2016: 67%), which consist of payroll and mortgage loans. Due to its nature as a low-risk loan segment, payrolls deliver excellent asset quality with an NPL ratio of 0.44% in 2016. Helped by its status as a regional development bank, BJTM gained exposure in providing payroll services to regional civil servants of the East Java government, which accounted for >50% of its total outstanding consumer loans in 2016. Going forward, we believe civil servants’ payroll loans will remain as a core asset driver, accounting for 68.2% of total loans in 2017F. Given the growth in the consumer segment, we expect loan growth to reach c.7% y-y in 2017F and 2018F, slightly higher than 4.4% y-y in 2016.

- High NPL ratio in SME & Commercial (10-13%) remains key concern: Despite its asset growth being supported by strong payroll loans, BJTM is dragged down by the non-consumer division on poor asset quality. The SME and commercial segments have worsened the overall NPL ratio to 4.77% (2015: 4.29%). The SME segment’s NPL ratio stood at 9.6% (2015: 22.7%) while that of the commercial segment stood at 12.77% (2015: 9.97%). We believe that BJTM’s current valuation (at more than +2SD above mean) looks unjustified with the current elevated NPL level.

- Earnings likely to grow slower on the back of higher provisioning expenses: Given that the high NPL ratio will remain an issue in 2017F, we expect earnings growth to slow to 7% y-y in 2017F (2016: 16% y-y) on higher provisioning expenses of IDR553bn in 2017 (vs. 2016: IDR510bn). In addition, we expect the NII to grow slower at 5.3% y-y in 2017F vs. 9% y-y in 2016, and the NIM to come down to 6.7% in 2017F (2016: 6.9%) before further declining to 6.5% in 2018F.

Downgrade to REDUCE; prefer $BNGA and $PNBN for Small Cap Banks
BJTM is currently trading at 1.4x 2017F PBV, at more than +2SD of its 5yr mean. We downgrade BJTM to REDUCE with a revised TP of IDR600 (from IDR475), now based on a PBV multiple of 1.16x, at 1SD above its 5yr mean, on the new 2017F BVPS of IDR513 (previous TP based on 1x PBV on previous 2017F BVPS of IDR475 – see exhibit 10). We prefer BNGA (IDR1,215, BUY) and PNBN (IDR935, BUY) within the Indo Small Cap banks universe. Risks to our call include: 1) Stronger-than-expected economic growth, 2) NPL improvement, and 3) Lower-than-expected provisioning.