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P H
Apr 12,2017 12:39:32

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.

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P H
Nov 22,2016 12:47:08

Bank Jatim: 10M16 Results In Line With Expectations ($BJTM; Rp484; Neutral; TP Rp550)

  • Bank Jatim booked net profit of Rp897bn in 10M16, +9% yoy, accounting for 87% of FY16 consensus’ and our FY16 expectation. Net income growth was driven by decline in provision expense of -30%yoy. Meanwhile, PPOP declined by 2%yoy due to slow operating income growth of +4%yoy and high operating expense growth of +12%yoy. On the monthly basis, net income came in at Rp60bn, -32% mom/-54%yoy.

  • Loan growth +1% yoy, deposit growth -5% yoy. Loan growth was supported by consumer loans at +7%yoy, meanwhile commercial and SME loans declined by 10% yoy and 3% yoy, respectively. On the other hand, decline in deposit growth was driven by decline in time deposits of 12%yoy and demand deposits at 11%yoy. Meanwhile, savings account grew by +14%yoy bringing CASA to 70% in Oct16 from 68% in Oct15. LDR stood at 72% in Oct16 vs. 67% in Oct15.

  • NPL slightly deteriorated to 4.93% in Oct16 from 4.92% in Sept16. Based on loan segment, SME and commercial NPL increased to 12.48% (from 12.43% in Sept16) and 12.03% (from 11.82% in Sept16), respectively. Meanwhile, consumer NPL experienced a slight improvement to 0.88% in Oct16 from 0.89% in Sept16. Provisioning expenses declined by 30% yoy to Rp389bn in 10M16 while provisioning level increased to 4.2% in Oct from 4.1% in Sept.

  • NIM improved to 7.8% in 10M16 vs. 7.6% in 10M15 as decline in cost of funds of 33bps outweighed decline in asset yield of 10bps.On a monthly basis, NIM increased to 7.6% in Oct from 7.4% in Sept.

  • Cost to income ratio deteriorated to 48% in 10M16 vs. 45% in 10M15. On a monthly basis, cost to income ratio increased to 56% in Oct16 from 49% in Sept16.

  • Maintain Neutral with TP of Rp550 for the counter which is trading at 0.9x P/BV 2017. We remain cautious on the bank’s NPL as commercial and SME NPL which has been >10% over the past year.

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P H
Nov 08,2016 18:32:53

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.

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P H
Nov 08,2016 18:29:18

MQQ Strategy – Nov 2016 update

- The Mansek Quant Quest (MQQ) strategy marked its debut with 2.9% return (vs JCI’s 1.1%) in October. We reshuffle the MQQ ten-stock portfolio for November by substituting $KREN and $LPPF with $BBNI and $BJTM.

- Top picks for November 2016. We reshuffle our MQQ ten-stock portfolio, adding $BBNI and $BJTM to replace $KREN and $LPPF. Estimated outperformance (equal-weighted) of the rebalanced portfolio is 1.8% relative to our Quant universe, with greatest contributions coming from Value and Profitability again this month. For a forecast of each stock in the universe, please refer to Figure 8 inside.

- Outperformed in October 2016. October is a boost to confidence. The MQQ’s recommendations (includes Mansek non-rated) managed to gain an equalweighted return of 2.9% (vs JCI’s 1.1%) in its debut. The biggest contributors were the coal-related stocks – $PTBA (+23.6%) and $UNTR (+22.2%), while the cement companies dragged on performance – $INTP (-5.2%) and $SMGR (-2.5%). Overall, it is a tougher month as the MQQ strategy tends to perform better in trending markets, while October is rather uneventful for the JCI.

- What investment styles worked? Momentum and Profitability worked spectacularly in October, with each recorded a long-only return of 8.3% mom and 11.4% mom respectively. Monthly style performance, however, can swing widely, and is thus a noisy indicator of future performance. The MQQ weighting to each style in November remains largely similar – 26% Value, 23% Profitability, 25% Growth and 26% Low Risk.

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P H
Jun 04,2016 18:47:46
Bank Negara Indonesia : Key Takeaways From Bojonegoro Site Visit
 
Last weekend, BBNI took us with several foreign and local investors on a site visit to Bojonegoro, which had the highest GDP growth of 13.3% in the country last year. By leveraging its close connection with the local government, BBNI is able to tap into the medium-size enterprise and corporate loan segments in the region. We maintain our BUY call and GGM-derived TP of IDR6,200 (34% upside). The stock is currently trading at 1.0x 2016F P/BV (-1SD of its historical mean).

¨ Support from local government. Bojonegoro recorded 13.3% GDP growth in 2015, thanks to its abundant oil & gas reserves. Amid lower commodity prices, the local government has set the minimum wages for villages at only IDR1m (below the minimum wages of IDR1.3m for its city) to stimulate growth in surrounding villages and to attract more local and foreign investors in the non-commodity sector. The local government has also simplified the permit application process for investors under one roof in an effort to achieve more sustainable GDP growth going forward.

¨ More players in local banking landscape. Given its high GDP growth, more banks have opened branches in Bojonegoro. Apart from state-owned enterprise (SoE) banks and regional bank (Bank Jatim), these include private banks eg Bank Tabungan Pensiunan Nasional (BTPN), Panin (PNBN) and Bank Central Asia (BBCA)). This has led to increased competition in the area. Specifically, we think that Bank Negara Indonesia (BBNI) is well-positioned due to its strong relationship with the local Government and business owners.

¨ Leveraging its relationship. During our site visit, we met up with one of BBNI’s corporate borrowers – the biggest Wallet bird nest producer in the area. The company started out managing bird nests but has now expanded to the downstream business by producing bird nest bottled beverage using recycled water and by-products of its upstream bird nests. However, we think its downstream business is still at an early stage and would only be profitable in three years’ time at the earliest due to the small market for specialised (bird nest) bottled beverage. Moreover, with the estimated ASP of IDR35,000, its product is relatively expensive in the bottled beverage market given that most Indonesians prefer tea bottled beverage. The second BBNI borrower we visited was a local batik producer, who emphasised that her business is a side job to supplement her full-time employment as a junior high school teacher. This falls under BBNI’s small business segment due its <IDR5bn loan size. On the other hand, Bank Rakyat Indonesia (BBRI) caters more towards loan sizes of <IDR100m, while Bank Mandiri (BMRI) taps more into the national-scale corporate segment.

¨ Maintain BUY and GGM-derived TP of IDR6,200, which implies 1.3x 2016F P/BV. The stock is currently trading at 1x 2016F P/BV (-1SD of its historical mean). Key risks to our call are:
i. Government intervention risk;
ii. Lower-than-expected GDP growth that may worsen its assets quality. (Eka Savitri)

$BBNI $BJTM $PNBN $BTPN $BBCA $BMRI $BBRI

Bull
P H
Apr 02,2016 11:47:03
Indonesia Banks: 4Q15 Results Round-Up

Earnings growth: our 10 banks +8.1% y-y; industry: -1.5% y-y
All 10 banks under our coverage have reported 4Q15 net earnings, booking 8.1% y-y growth, vis-à-vis the industry average of a 1.5% y-y decline. On a quarterly basis, the 10 banks reported 3.3% q-q growth while the industry average contracted by 3.3% q-q, mainly due to the limited advantages of a lower blended cost of funding. The industry NIM reached 5.4% (+10bps q-q) in 4Q15 compared to 30bps higher q-q for our 10 listed banks. Only 4 of the 10 banks displayed lower NIMs: $BBRI (-20bps q-q), $BBNI (-20bps), $BJTM (-60bps) and $BBKP (-30bps). The better-than-expected 4Q15 earnings were supported by lower provisioning (-9.4% q-q) on improved loan quality, as most banks restructured their debt, benefiting from the OJK relaxation policy in pursuing NPLs based on debtor abilities to serve their loans while ignoring financial stability and the industry outlook.

Loan growth: 10.4% y-y vs 11.4% y-y on lower GDP
Sector 4Q15 loan growth was 2.5% q-q, bringing full-year 2015 loan growth to 10.4%, vis-à-vis 11.4% y-y growth in 2014, in line with the deceleration in GDP growth to 4.8% in 2015 from 5.0% in 2014. Our 10 listed banks’ loan growth of 12.6% was above the industry average, except for $BDMN and $BJTM. $BBTN posted the highest growth, at nearly 20% y-y, benefiting from continued strong demand from the low-end market segment, including government subsidized mortgages. Corporate loans were the main contributor, while consumer loans (9.1% y-y) moved at a slower pace due to slow mortgage demand. This brought the proportion of consumer loans to total loans to 27.1% (-30bps y-y). However, deposits contracted 1.1% q-q, bringing full-year 2015 growth to only 7.3% y-y. As a result, LDR increased to 92.5% from 89.9% a year earlier.

Seeking normalization under new low-lending rate regime
In 2016, we assume loan growth of 12.7% y-y on increased investment in infra-related projects, with the government having recently encouraged banks to set lending rates at single-digit levels. This, however, may create challenges given Indonesia’s geography, high inflation, limited fee-based income and low employee productivity. On monetary policy, lower lending rates may only be achieved once the benchmark rate reaches 6.25% (currently: 6.75%, or -125bps y-y), setting the ceiling on SOE deposit rates and eliminating current deposit rate spreads from 200bps and 225bps for bank categories IV and III, respectively, to 75bps and 100bps. On macroprudential policy, OJK should lower both the minimum primary (currently: 6.50% from 8.00% previously) and secondary (currently: 4.00%) reserve requirements, increasing LFR and lowering RWA. We believe this move may lower bank NIMs by 40-50bps (vs our previous estimate of 30-40bps) for the 10 banks we cover, but the overall industry may be worst off (exhibit 31). Based on this, combined with continued high provisioning, we forecast overall 2016 net earnings growth of around 6.3% y-y, helped by improved operating efficiencies and increased fee-based income.
Bull
P H
Apr 02,2016 11:47:03
Indonesia Banks: 4Q15 Results Round-Up

Earnings growth: our 10 banks +8.1% y-y; industry: -1.5% y-y
All 10 banks under our coverage have reported 4Q15 net earnings, booking 8.1% y-y growth, vis-à-vis the industry average of a 1.5% y-y decline. On a quarterly basis, the 10 banks reported 3.3% q-q growth while the industry average contracted by 3.3% q-q, mainly due to the limited advantages of a lower blended cost of funding. The industry NIM reached 5.4% (+10bps q-q) in 4Q15 compared to 30bps higher q-q for our 10 listed banks. Only 4 of the 10 banks displayed lower NIMs: $BBRI (-20bps q-q), $BBNI (-20bps), $BJTM (-60bps) and $BBKP (-30bps). The better-than-expected 4Q15 earnings were supported by lower provisioning (-9.4% q-q) on improved loan quality, as most banks restructured their debt, benefiting from the OJK relaxation policy in pursuing NPLs based on debtor abilities to serve their loans while ignoring financial stability and the industry outlook.

Loan growth: 10.4% y-y vs 11.4% y-y on lower GDP
Sector 4Q15 loan growth was 2.5% q-q, bringing full-year 2015 loan growth to 10.4%, vis-à-vis 11.4% y-y growth in 2014, in line with the deceleration in GDP growth to 4.8% in 2015 from 5.0% in 2014. Our 10 listed banks’ loan growth of 12.6% was above the industry average, except for $BDMN and $BJTM. $BBTN posted the highest growth, at nearly 20% y-y, benefiting from continued strong demand from the low-end market segment, including government subsidized mortgages. Corporate loans were the main contributor, while consumer loans (9.1% y-y) moved at a slower pace due to slow mortgage demand. This brought the proportion of consumer loans to total loans to 27.1% (-30bps y-y). However, deposits contracted 1.1% q-q, bringing full-year 2015 growth to only 7.3% y-y. As a result, LDR increased to 92.5% from 89.9% a year earlier.

Seeking normalization under new low-lending rate regime
In 2016, we assume loan growth of 12.7% y-y on increased investment in infra-related projects, with the government having recently encouraged banks to set lending rates at single-digit levels. This, however, may create challenges given Indonesia’s geography, high inflation, limited fee-based income and low employee productivity. On monetary policy, lower lending rates may only be achieved once the benchmark rate reaches 6.25% (currently: 6.75%, or -125bps y-y), setting the ceiling on SOE deposit rates and eliminating current deposit rate spreads from 200bps and 225bps for bank categories IV and III, respectively, to 75bps and 100bps. On macroprudential policy, OJK should lower both the minimum primary (currently: 6.50% from 8.00% previously) and secondary (currently: 4.00%) reserve requirements, increasing LFR and lowering RWA. We believe this move may lower bank NIMs by 40-50bps (vs our previous estimate of 30-40bps) for the 10 banks we cover, but the overall industry may be worst off (exhibit 31). Based on this, combined with continued high provisioning, we forecast overall 2016 net earnings growth of around 6.3% y-y, helped by improved operating efficiencies and increased fee-based income.
Bull