Bank Tabungan Negara Earning adjustment on higher problem loans

Bank Tabungan Negara: Earning adjustment on higher problem loans (BBTN, Rp1,340, Buy, TP: Rp1,700)

We lowered our TP by 19% to Rp1,700 based on 1.5x P/BV 2013 after factoring higher NPL level post the 1Q13 results that resulted in a13.8% cut in our 2013 earnings forecast. For every 0.5% increase in NPL from the base case of 3.0% in 2013, net earnings will be cut by a further 10.2%.

NPL level remains stubbornly high. BTN saw its NPL level increasing to 4.8% in March 2013 from 4.1% in December 2012 and 3.2% in March 2012. This is the highest NPL since mid-2007 when it was 4.84%. Loan-loss coverage ratio has been on the decline as well, currently at 25% compared with 41% a year ago. However, given the rising value of collaterals there is little concern over such low coverage ratio here.

Most of the rising NPL in subsidized housing loans. Part of the reason for the rising NPL is the subsidized housing loans, which make up 30.5% of total loans in March 2013, in particular the interest only balloon payment loans (IOBP), amounting to Rp6t (7% of total loans) with the NPL level of 8%, according to the management.  The loans were made in 2008-2010 through a government program to help people to own a house by paying interest only for three years, after which they have to start pay.

Management’s NPL target is below 3%. During the last analyst meeting the management indicated its target to bring NPL level to below 3% by the year-end and hence we use this guideline instead of our earlier expectation of 2.5%.  The 3% level is higher than the 2.1% expected during the FY12 result analyst meeting which makes us doubtful if they can achieve the target.

Earnings cut with lower TP of Rp1,700. Based on our new forecast, which is 13.8% lower than the previous expectation for 2013, we calculate that for every 50-bp additional NPL, assuming the same coverage ratio of 38%, we have to cut net earnings by 10.2%. The new TP is based on 1.5x P/BV 2013F using the GGM model with ROE of 15.2%, COE of 12.5% and growth rate of 7.25%.

for Indonesia Market Summaries 16 May 2013

Another good year for banks in Indonesia

Entering 2013 banks are more optimistic compared to in 4Q12, translating into 23.5% loan growth. However, with a more conservative stance on provisioning charges, we expect slower earnings growth of 13% on average in 2013. We assign a NEUTRAL stance on the industry with BBRI and BBNI on the larger banks and BJTM and BBTN on the smaller banks as our top picks.

Stronger loan growth in 2013. We expect average loan growth on our bank universe of 23.5% in 2013 compared with 22.7% in 2012. This is expected to come from investment or corporate loans and consumer loans, which have been supported by the rising middle income.

NIM to remain high at more than 6%. Average net interest margin on our bank universe is forecasted at 6.56% in 2013 and 6.50% in 2014. We do not see NIM to decline significantly in the medium term given the high cost of business operation in the country.

Asset quality at its best. Industry NPL level stood at 2.0% in January 2013, the lowest since the Asian crisis. This is supported by high coverage ratio of more than 150%. We do not expect any significant asset quality deterioration in the next two years.  Nevertheless we expect a more conservative stance on provisioning charges which will limit earnings growth to 13% in 2013.

No Tier-1 capital raising. With average total CAR of 19.3% in January 2013 (17.% in our bank universe) we do not expect any Tier-1 capital raising in 2013-14. The average ROE is expected at 21.4% and 21.8% in 2013-14, a comfortable level for sustainable growth.

Valuation and stock picks. The banks are trading at 2.8x P/BV 2013F, 1STD above the mean valuation since 2004. We prefer BBRI and BBNI for the large banks and BJTM and BBTN for the smaller ones.