BRI has shown improvement in micro lending

Operating improvement to continue (BBRI, Buy, Rp9,300, TP: Rp10,600)

BRI has shown further improvement in micro lending and we expect this to continue this year. Asset quality in this micro loan segment, and the rest, is not expected to deteriorate much even if inflationary pressures increase.

Strong loan growth supported by corporate, medium and micro loans. BRI’s 28% YoY (+4% QoQ) consolidated loan growth in 1Q13 was supported by corporate loans which grew 59% YoY while medium and micro loans grew 24% and 22% YoY, respectively. Such growth rates are the highest in the past three years but we expect the rates to slow down towards 24% by yearend and to continue growing at 21% in 2014.

Micro loans on the rise again. This loan segment accounts for 31% of total loans in March 2013 and recorded 22% YoY loan growth. The loan growth has been rising since June 2012 when it only recorded 12% YoY growth rate. The bank estimates its market share in the micro lending is around 40%.

Asset quality is under control. Despite the increase in NPL to 2.0% in March 2013 from 1.8% in December 2012, we believe BRI is able to keep asset quality under control, expecting NPL level of 2.0-2.1% in 2013 and 2014. We also expect the bank to maintain its high loan loss coverage ratio of 175%, lower than the 200% level recorded in 2010-2012. This should provide some cushion in case of any further deterioration of asset quality if subsidized fuel prices are increased.

Minimal impact on rising rates. We believe BRI will see minimal impact if interest rates increase by 100 bps. Certainly loan growth will slow and problem loans will rise but not to the alarming level. In addition the bank’s high loan-loss-coverage ratio provides a buffer for higher NPL.

Maintain Buy. Trading at 2.9x P/BV 2013F with share price outperforming the JCI by 16% YTD we believe there is still some upside for BRI with the expected further loan improvement in micro lending. We tweaked our earnings forecasts but keep our TP of Rp10,600 based on 3.3x P/BV 2013F. The risk is rising inflation which may increase NPL level and generate a negative sentiment towards the banking sector.