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