Bank Tabungan Negara - FY12 results in line with expectations

• BTN reported Rp1,364bn net profit for 2012, which are in line with our and the market expectations. Despite the rising NPL the bank was able to keep operating expenses low leading to the 22% y-y earnings growth and improved ROE.
• The 25% y-y net interest income growth was supported by 28% y-y loan growth (+6% q-q) which came from housing loans (+26% y-y, 86% of total loans) and non-housing loans (+44% y-y, 14% of total loans). Of the housing loans, non-subsidized housing loans posted the hiighest growth rate of 57% y-y while the subsidized housing loans saw a 1% y-y contraction due to slow realisation in the first half of 2012 as well as the inavailability of low cost housing of more than 36sqm, which is now allowed again. This condition was normalised in 4Q12 when the disbursement of subsidized housing loans quadrupled to Rp2.8tr compared to those in 3Q12 and should be sustainable in the future. The average loans for subsidized housing loans is estimated at Rp65m while for the non-subsidized is around Rp200-300m.
• On the liability side, total deposits increased 30% y-y leading to LDR of 101% (103% in 2011) but loan to funding (including bonds) is around 93%% vs. 94% in 2011. Of the total deposits, CASA deposits still account for 42% with the plan to increase it to 50-55% in five years time.
• Asset quality deteriorated with NPL increased to 4.1% in December 2012 from 3.7% in September 2012. This is understandable as the new management team, which was appointed in December wants to clean up the bank in accordance to the prudential banking practice. Most of the NPL  increase was in the subsidized housing loans (31% of total loans) which saw the level rose to 5.0% from 3.6% in September while the NPL level in the non0-subsidized housing loans declined to 2.9% from 3.0% over the same period. It is indicated that the increase was mostly on administrative issues, which are to be corrected within 3-6 months. Due to rising NPL the bank had to set aside more provisioning charges and we estimate they wrote off around Rp155bn in 4Q12, the highest quarterly write off so far.
• Cost to income ratio declined to 61% in 2012 from 63% in 2011 despite the additional 116 outlets, mostly the low-cost cash outlets in the housing area to collect funding (that is why they can achieve 30% growth in deposits). CAR improved thanks to the recent rights issue of Rp1.9tr.
• Going forward, the new management plans to increase total loans by 28% in 2013, mostly on the non-subsidized housing loans; deposit growth of 30%; NPL to decline to 2.1% and increase fee income. NIM is expected to decline due to competition. The earnings consensus for 2013 is around Rp1.7tr and at this level the counter is trading at 1.4x P/BV 2013.