Equity Research Indonesian Banks 2H14 Outlook September 22, 2014
Stuck In The Slow lane Jasa Adhimulya (6221) 5793-0008 ext.159
[email protected]
Although having near-term concerns, we are initiating coverage on the banking sector with a positive long-term outlook for the following reasons: Low Credit Penetration Indonesia’s Credit-to-GDP ratio is among the lowest in the AsiaPacific region. It might be viewed as a sign that the loans disbursed by banks are still insufficient to finance Indonesia’s overall economic expansion. Despite being forecasted to grow only 5.2-5.5% this year, Indonesia’s economy is still staring at rosy prospect in the medium to longer term. In addition to Household Consumption which has been the main driver, infrastructure spending is also expected to accelerate growth. We believe banks should benefit from and play a crucial role in financing this impending economic expansion. Strong Financial Profiles Amid Macro Pressures In our view, Indonesian banks should be able to withstand a tougher operating condition i.e. high interest rate environment and lackluster growth momentum, thanks to their sound fundamentals and superior margins. Assuming all goes well on the political front and macro indicators improve, the strong financial profiles will set a strong base for growth starting in FY15. Downside Risks Uptick in the interest rate underpinned by the increased likelihood of tightening of US monetary policy next year along with a softer macro environment due to prolonged economic rebalancing. Valuation The valuation of banks under our coverage is attractive, at a rolling PBV of 1.6x, trading at a discount to the financial sector (JAKFIN) that is currently trading at 2.2x . Our top pick for the sector is BTPN, given its superior operating metrics, namely lowest Gross NPL ratio and vast lending activities. It also justifies the slight valuation premium to peers of our 2.7x target P/TBV. Table 1. Key Recommendation And Valuation
Code BBKP BJTM BTPN
Share Price (IDR) Rating Current Target BUY 745 885 BUY 450 490 BUY 4,555 5,470
Upside (%) 18.8 8.8 20.1
Div Yield (%) FY14F 5.5 12.2 -
Potential Return (%) 24.3 21.0 20.1 Average
P/TBV (x) FY14F FY15F 1.1 1.1 1.1 1.0 2.7 2.3 1.6 1.5
P/E (x) FY14F FY15F 5.6 4.9 5.9 5.6 10.3 9.5 7.3 6.7
ROAE (%) FY14F FY15F 18.0 20.8 19.7 19.4 26.1 25.8 21.3 22.0
ROAA (%) FY14F FY15F 1.5 1.6 3.1 2.9 3.5 3.5 2.7 2.7
Source: Reliance Securities Estimate
See important disclosures at the end of this publication
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Indonesian Banks Outlook 2H14 Low Credit Penetration High interest rate and lackluster growth momentum continue to be the double whammy that the Indonesian banking system is resiliently facing in 2H14. Indonesia’s Credit-to-GDP ratio, among the lowest in the Asia-Pacific region (Graph 1), might be viewed as a sign that the loans disbursed by banks are still insufficient to finance the country’s overall economic expansion. However, a higher Credit-to-GDP ratio might also reflects a higher degree of leverage which, in all cases, is likely to increase the fragility of the financial system. Graph 2. Loan Growth (%) And Nominal GDP Growth (%)
Graph 1. Credit-To-GDP Ratio (%) 350
40
300
35
250
30
200
25
150
20
100
15
50
10 5
0 JPN
HK
THA
PRC
AUS
VN
SG
MY
PH
INA
CAM
2003
2005
2007
Credit/GDP
2009
Loan Growth
2011
2013
Nominal GDP Growth
Source: World Bank, Bank Indonesia
Since FY10 Indonesia has witnessed credit growth that has been excessively outpacing its nominal GDP growth (Graph 2) as banks responded to accommodative policy stance by Bank Indonesia (BI) in the wake of 2008 global recession. The credit expansion proved to be unsustainable as the economy was losing steam, growing less than 6% (YoY) since 2Q13. Moreover, in 2H13 BI felt compelled to tighten monetary policy to halt foreign capital outflow triggered by Indonesia’s ballooning Current Account Deficit (CAD) and the fear over the normalization of U.S. monetary policy. Entering 2014, Loan-to-Deposit (LDR) went past 90%, reaching a multiyear high 91.2% in 1Q14 end (Graph 3). This is very close to the ceiling of Bank Indonesia target band 0f 92%. Loans logged a 17.2% (YoY) rise in 1H14, compared to 21.6% (YoY) in FY13, spearheaded by Investment loans (Graph 4), which stubbornly grew above 30% (YoY) from June 2013 to May 2014. Graph 3. Loans And Deposits Growth (% YoYY)
Graph 4. Loans Growth (% YoY)
30
95
25
90
38 33 28
20
85
15
80
23 18 13
10 Feb-11
75 Nov-11 LDR (RHS)
Aug-12 Loans Growth
May-13
Feb-14
8 Feb-12
Deposits Growth
Nov-12 Working Capital
Aug-13 Investment
May-14 Consumption
Source: Bank Indonesia, OJK
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Indonesian Banks Outlook 2H14 We expect LDR to moderate further and dip below 90% in 2H14 as BI urges banks to limit their balance sheet expansion and as businesses are taking a Wait and See approach in the face of weaker domestic demand. Both foreign and domestic firms have started to scale down or delay their investments (Graph 5). Banks under our coverage posted >80% LDR in FY11-13 (Graph 6). By the end of 1H14, BTPN’s LDR showed no sign of slowing down while BBKP’s LDR was little changed. It came as no surprise that BJTM has the lowest LDR (69.9%) despite chalking up the fastest loan growth (Graph 7) as it was enjoying 29.4% (YoY) surge in deposits (Third Party Funds), compared to 4.3% (YoY) and 10.4% (YoY) rises that BBKP and BTPN booked respectively. Graph 6. Loan To Deposit (LDR) %
Graph 5. Direct Investment (IDR Tn) 100
30
90
25
80
20 70
15 60
10
50
5
40 30
0 2006
2007
2008
2009
2010
Foreign Direct Investment
2011
2012
2007
2013 1H2014
2008
2009
2010
BBKP
Domestic Direct Investment
2011
2012
BJTM
2013
1H2014
BTPN
Source: Bank Indonesia
Graph 7. Credit Growth (%)
Graph 8. Excess Deposits Over Loans
70
600
60
95
550 90
50 500
40 450
85
30 400
20
80 350
10 0
300
2005
2006
2007
BBKP
2008
2009
BJTM
2010
2011
BTPN
2012
2013 1H2014
Feb-11
System
75 Nov-11
Aug-12
Excess Deposits (IDR Tn)
May-13
Feb-14
LDR (RHS)
Source: Bank Indonesia, BKPM
Encouraging Sign That Liquidity Is Less Challenging Robust loan growth in an extended period has spurred excess deposits to deplete rapidly (Graph 8). To maintain adequate level of liquidity, banks must rely on borrowed funds from money market, such as interbank loans. JIBOR jumped in mid FY13 as the cycle of high interest rate arrived (Graph 9). Higher reliance on borrowed funds rather than deposits poses a threat of systemic risk. It raises the costs for banks by making them rely on more expensive funding through borrowings. If perception about the banking system’s health turns negative, fear of a bank failure would emerge, prompting a further hike in interbank rate. Competition for deposits will remain intense over the next 12 months, as seen by the significant increase in interest rates offered on time deposits (Graph 10). This could lead to higher costs of funding, which is potentially good news for depositors. We suspect steady upticks in deposits growth that we have observed since February 2014 was held up by the increase in Time Deposits.
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Indonesian Banks Outlook 2H14 Graph 10. Average Interest Rate On Time Deposits
Graph 9. Interbank Loans (IDR Bn) 9 8
33
10
28
9
23
8
18
7
13
6
8
5
7 6 5 4 3 Feb-11
Oct-11
Jun-12
Loans (IDR Tn) - RHS
Feb-13 JIBOR 1M (%)
Oct-13
Jun-14
Feb-11
Nov-11 1m
JIBOR 3M (%)
Aug-12 3m
May-13 6m
Feb-14 12m
Source: Bank Indonesia, OJK
BTPN has the weakest deposit-taking franchise as more than 80% of its deposit mix comes from Time Deposits (Graph 11) while the biggest portion of BJTM’s deposit mix are in CASA (Current Account Saving Account) given that it was established as the payment bank of the East Java provincial government, thus has the sole and exclusive access to civil servants in East Java. Salary payment for all civil servants in East java is done through BJTM. Graph 12. High Level Of Capitalization
Graph 11. Deposit Mix in 1H2014 70
22
60 20
50 40
18 30 20
16
10 0
14 BBKP
BJTM Demand
Savings
BTPN
Jan-12
Time
Aug-12
Mar-13
Total CAR (%)
Oct-13
May-14
Tier I CAR (%)
Source: Bank Indonesia, BBKP. BJTM. BTPN
Strong Financial Profiles Thanks to sound earnings and periodic fund raising through rights issue and bonds, Indonesian banks continue to demonstrate high level of capitalization, which provide solid buffers against potential asset quality weaknesses due to a tougher operating condition. The Tier 1 Capital ratio stood at 17.8% in 1H14, well above the Basel III’s new minimum 7% requirement for Tier I CAR. Total CAR sat comfortably in 19.4%, up from 18.1% in December 2013 (Graphic 12). Because many (mainly small) banks are unable to fully pass on the higher funding costs to borrowers, the banks' net interest margins will dip further, lowering overall profitability. System-wide net interest margins fell to 4.2% in 1H14 from an average of 5.4% between 2012 and 2013. With declining interest margins and higher credit costs as well as operating expense, we expect most banks’ return on assets (ROA) to be marginally compressed this year (Graph 13). BBKP’ NIM stood at 3.90% in 1H14, below industry average but indeed an improvement after bottoming out at 3.55% in 2Q13. BJTM’s NIM barely stayed above 7%, after peaking at 7.7% in 1Q14. BTPN’s NIM was stable at 11.8% (Graph 14).
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Indonesian Banks Outlook 2H14 Graph 13. System Profitability And Efficiency 7.0
Graph 14. Net Interest Margin (NIM) % 85
14 12
6.0
80 10
5.0 75
8
4.0 6 70
3.0
4
2.0
65 Mar-12
Oct-12 ROA (%)
May-13 NIM (%)
2 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Dec-13 Opex/Op Inc (%)- RHS
BBKP
BJTM
BTPN
Source: Bank Indonesia, BBKP. BJTM. BTPN
To diversify top line, banks are cranking up Fee-Based Income (FBI). In this regard, BBKP has the strongest unrelated to market volatilities non-interest income. Its Fee Based Income (FBI) constitutes at least 70% of its total non interest income (Graph 15). Roughly 53-56% of BBKP’s FBI originated from credit cards while the rest is derived from Public Service as BBKP engages in strategic alliances with State Owned Enterprises (SOEs) such as JAMSOSTEK, PLN and TASPEN.
Graph 16. NPL Reserve
Graph 15. FBI To Non-Interest Income 70
80%
140
65
130
60% 60 120 55 40% 110
50 20%
45 1H12
FY12 BBKP
1H13 BJTM
FY13
1H14
Feb-11
100 Nov-11
Aug-12
NPL (IDR Tn)-LHS
BTPN
May-13
Feb-14
NPL Coverage (%)
Source: Bank Indonesia, OJK
Manageable Asset Quality Risk Rapid expansion often encourage risk taking behavior by banks. Relaxed underwriting standards, inadequate controls and speculative investments typically accompany a prolonged credit boom. As a result, asset quality would deteriorate and be put under pressure. Gross Non-Performing Loans (NPL) increased by 28.4% in absolute terms in 1H14, equaled to 2.2% of gross loans, creeping up from 1.8% in FY13. Consequently, during the same period, NPL Coverage ratio plunged from 125.4% to 105% (Graph 16), hurting banks’ ability to absorb potential losses from NPL. However, including the Special Mention Loans (SML), the NPL Coverage ratio was only 34.8% in 1H14, down from 40.5% in previous year. The SML is averaging 4.1% of total gross loans between January 2012- June 2014 (Graph 17). Scrutiny over SML is warranted as it is larger than NPL but has low reserve, It poses asset-quality risk in an economic downturn and may contribute to a potential NPL spike in 2H14.
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Indonesian Banks Outlook 2H14 Graph 18. Gross NPL (%)
Graph 17. Asset Quality 5
75
6
70
5
65
4
60
3
55
2
50
1
45
0
4
3
2
1 Dec-11
Jul-12
Gross NPL (IDR Tn) - RHS
Feb-13
Sep-13
Gross NPL (%)
Apr-14
2007
2008
SML (% Of Gross Loan)
2009
BBKP
2010
2011 BJTM
2012
2013
1H2014
BTPN
Source: Bank Indonesia, OJK
Historically, BTPN has the lowest Gross NPL at around 0.6-1.1% (Graph 18). BBKP had bent over backwards in reducing its Gross NPL to just under 3%. In stark contrast, since FY12, BJTM’s Gross NPL has been staying above 3%, attributed to its SME loans whose NPL stand above 10.00%. Graph 19. BI Rate (%) Actual vs Target 11% 10% 9% 8% 7% 6% 5% 4Q2008
3Q2010 Taylor Rule Target
2Q2012
1Q2014
Actual BI Rate
Source: Bank Indonesia, BPS, Reliance Estimate
Risks To Our Ratings And Price Targets Looking ahead, we fully subscribe to the view that multiple interest rate hikes and a prolonged economic deceleration are lurking in the shadow. In its latest forward guidance, Bank Indonesia (BI) stated it will not loosen monetary policy until the current account deficit narrows to 2.5% of GDP, a level unlikely to be reached until after next year. In 2015, BI aims to narrow the current account deficit, which reached 4.3% in 2Q14 to more sustainable level of 3.00%. Furthermore, the incoming government is toying with the idea of raising the price of subsidized fuel to reduce the exorbitant fuel subsidy that has long prevented the government from allocating more funds to development. The increase, reportedly to be within the range of IDR500-IDR3,000 per liter, would certainly stoke inflationary pressure. Our Taylor rule-based calculation show that BI Rate would likely to increase another 25 bps to 7.25% in the next 3-6 month (Graph 19). In short, higher interest rates would reduce NIM of banks with high reliance to time deposit funding and thus an increase in credit costs for banks. Softer macro-economic variables ahead may substantially deteriorate asset quality.
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Indonesian Banks Outlook 2H14 Valuation We use a blend of the two-stage Dividend Discount Model (DDM) and the Residual Income Valuation Model (RIVM) for our banks universe, imputing a five-year forecast growth period before the terminal growth stage. We assume a uniform risk-free rate of 8.5% and an equity premium of 11.41%. Year-to-Date, BBKP and BJTM have returned 20% in terms of share price performance while BTPN is lagging, up 5.9% (Graph 20). The overall financial sector has risen 30.2% YTD. In comparison to its peers, BBKP’s current P/TBV is below industry average and median while BPTN’s current P/TBV is more than twice industry median (Table 3). Based on historical valuations, BTPN is the most attractive as it is trading at one standard deviation below historical averages on PER and at lower end of its P/TBV band. BBKP is the second most attractive as it is trading at around its historical averages on PER and P/TBV. Based on operational metrics, our top pick is BTPN as it has the highest Return On Average Equity (ROAE), Tier I Capital ratio and NIM while maintains very low Gross NPL. BJTM has the lowest Cost-toIncome ratio and Cost of Funds (COF), thanks to its high CASA ratio (78%). However, BJTM’s Gross NPL exceeds 3%, above industry average, as it aggressively pursues 25.5% loan growth in FY14. Table2. Gordon Growth Model Assumptions Banks
Code BBKP BJTM BTPN
Bank Bukopin BPD Jawa Timur Bank Tabungan Pensiunan Nasional
Risk Free Rate (%) 8.5 8.5 8.5
Risk Pre mium (%) 11.4 11.4 11.4
Beta 1.1 0.7 0.6
LT ROE (%) 20.9 23.3 27.2
Cost Of Equity (%) 20.9 16.5 15.2
Source: Reliance Securities Estimate
Graph 20. Relative Performance 130 120 110 100 90 80 70 Aug-13
Dec-13 BBKP
Apr-14 BJTM
Aug-14 BTPN
Source: Bloomberg
We like medium-sized banks (BUKU 3 or with core capital between IDR5-30 trillions and BUKU 2 or with core capital between IDR1-5 trillions) because most of them are niche players operating in a captive market. For instance, BJTM is managing local government money and a parent company of rural banks (BPR) in East Java. BBKP is focusing on Micro, Small and Medium Enterprises as well as Cooperative (Koperasi). BTPN provides loans to pensioners and productive poor using a community banking model. Furthermore, given the highly fragmented nature of Indonesia’s banking industry, huge size of the country economy (240 million people) and the relatively low level of financial development. the government has been persuasively promoting market-driven consolidation to strengthen banks’ capital base and to fend off a greater foreign bank presence. In our view, there are still far too many banks in Indonesia, and that takeover activity is likely to intensify in the future. 7
Indonesian Banks Outlook 2H14 Graph 22. BBKP 1 Year Forward P/TBV
Graph 21. BBKP 1 Year Forward PER 9.0
1.5
8.0
1.3
7.0 1.1
Average 5.7x
6.0
Average 0.9x 0.9
5.0 0.7
4.0 3.0
0.5
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Graph 24. BJTM 1 Year Forward P/TBV
Graph 23. BJTM 1 Year Forward PER 10.0
1.4
9.0 1.2 8.0
Average 6.7x
7.0
1.0
Average 1.0x 6.0 0.8 5.0 4.0
0.6
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jul-12
Graph 25. BTPN 1 Year Forward PER
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Graph 26. BTPN 1 Year Forward P/TBV 4.5
18.0
4.0
16.0
3.5
14.0
Average 12.0x 12.0
3.0
10.0
2.5
8.0
2.0
Average 2.9x
1.5
6.0 Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Source: Bloomberg, Reliance estimate
Table 3. Price Multiple Peers Comparison As of September 19, 2014 Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank Bank
BUKU III Category OCBC NISP Internasional Indonesia Permata Tabungan Negara Danamon Indonesia Pan Indonesia CIMB Niaga Mega BJB Bukopin Tabungan Pensiunan Nasional
Ticker NISP BNII BNLI BBTN BDMN PNBN BNGA MEGA BJBR BBKP BTPN AVERAGE MEDIAN
Current P/TBV 1.12 1.42 1.13 1.03 1.23 1.05 0.89 2.06 1.25 1.07 2.49 1.34 1.13
BUKU II Category Bank Mayapada Bank Sinarmas Bank Victoria International Bank Nationalnobu Bank Ekonomi Bank Mestika Dharma Bank QNB Kesawan Bank Artha Graha Internasional BPD Jawa Timur
Ticker MAYA BSIM BVIC NOBU BAEK BBMD BKSW INPC BJTM AVERAGE MEDIAN
Current P/TBV 1.65 1.31 0.49 3.31 1.63 3.05 1.48 0.43 1.19 1.62 1.48
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Equity Research Bank Tabungan Pensiunan Nasional (BTPN) PT. Bank BUKOPIN, Tbk
BUY
Initiation Of Coverage
Makes Banking Socially Inclusive
Commercial Banks 12-month Target Price (IDR) Stock Price @19/9/14 (IDR) Upside/Downside (%) Forecast Dividend Yield (%) Potential Return (%)
5,470 4,555 20.1 0.0 20.1
Bloomberg Ticker Reuters Ticker Market Cap (IDR Bn) 52 Week Hi-Lo 3-Month Avg Volume (000) Shares Outstanding (Mn) Free Float (%)
BJTM.IJ BJTM.JK 26,602.5 5,100-3,800 155 14,918 57
Major Shareholders (%) Sumitomo Mitsui Banking Corp TPG Nusantara S.a.r.l Public
40.0 25.9 34.10
Share Performance
We initiate coverage on Bank Tabungan Pensiunan Nasional (BTPN) with a Buy recommendation and a 12-month target price of IDR5,020, implying 17.% upside potential. Vast lending Activities Lending has been growing by 30.9% CAGR in FY09-13 while Gross NPL has been steadily very low (