Apr 05, 2016 15:30:37
Banking: 2M16 Results Wrap – Continuing Provisioning

- Banks have not shown significant earnings improvement in 2M16, with average net profit growth of 6% y-y, accounting for 14% of consensus expectations. Meanwhile, average NIM remained stable at 6.6% with loan growth of 11% y-y (vs. industry loans of 8%) and provisioning increased 60% y-y. Maintain Neutral.

- 6% y-y average earnings growth - banks have not shown any significant earnings improvement in the first two months of the year with average net earnings growth of 6% y-y. The results were still within expectations, accounting for 14% of average consensus’ full year forecast. Despite 16% y-y growth in operating income (net interest income plus non-interest income), banks have been increasing provisioning charges, which rose 60% y-y, as an anticipation for higher problem loans ahead. This, in addition to growing operating expenses, limited earnings growth. Among the larger banks, BBCA posted the highest earnings growth of 18% y-y, while among the smaller banks, BBTN, BJBR, and BJTM excelled with 19% y-y growth rate. Meanwhile BTPN and BDMN suffered 20% and 17% y-y earnings decline respectively due to competition in the micro lending.

- Loan and deposit growth. Due to cyclicality, most banks recorded negative or slow loan m-m growth in February, with average growth rate of 11% y-y, higher than the indicated industry loan growth of 8% y-y. Some banks reported high loan growth, such as BBNI due to government projects and BBTN on subsidized housing loans. Deposit growth was also weak, averaging 7% y-y, similar to the industry level, with CASA deposit growth overtaking time deposit growth at 12% vs. 1% yy. This is partly due to increasing government funds transferred as well as the crowding out effect on the government’s bond issuance and the regulation that requires pension funds to place some portion of their funds in government papers.

- Stable net interest margin for now – average NIM remained high at 6.6% in 2M16, up from 6.2% in 2M15 thanks to steeper reduction in cost of funds than in asset yield (60bps vs. 10bps). Banks have been cutting their time deposit rates on the back of weaker loan demand and are still taking the advantage before they start lowering the lending rates.

- Rising provisioning charges – the industry data shows the NPL level increased to 2.7% in January from 2.5% in December 2015 and we believe banks are experiencing the same pattern in February. This prompted banks to increase their provisioning charges, which rose 60% y-y. NPL is still expected to rise in the coming months, in particular from the retail commercial segment, and in terms of industry NPL comes mainly from mining related businesses. BBCA recorded the highest increase in provisioning charges at 429% y-y amid from the low base. PNBN came second with +262% y-y, while BJBR and BJTM bucked the trend with -62% and -39% y-y, as they have seen asset improvement. Provisioning level is now at 3.3% of total loans.

- Industry outlook and recommendation - We are still expecting rising problem loans in the coming months as a delayed effect from weak economic growth last year. Hence banks are still forecast to beef up their provisioning. We still rate Neutral on the sector, which is trading at 1.9x P/BV for 2016, with top picks on BBNI (TP Rp6,000) and BBTN (TP Rp2,100).