Indonesia Company Guide Bank Rakyat Indonesia Soft cannibalisation of Kupedes due to product...

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY

BUY (Upgrade from HOLD)

Last Traded Price ( 13 Feb 2017): Rp12,075 (JCI : 5,409.60)

Price Target 12-mth: Rp13,600 (13% upside) (Prev Rp12,200)

Potential Catalyst: Absence of kitchen sinking after the new CEO comes

in

Where we differ: Above consensus earnings forecast for FY18/FY19

Analyst Sue Lin LIM +65 8332 6843 [email protected] Benedictus Agung SWANDONO +6221 3003 4935 [email protected]

What’s New Better-than-expected KUR scheme; FY17-18F

earnings revised +2%/2% for better loan yields Branchless banking initiative is gaining traction

with transaction value/agents doubling y-o-y Conservative asset quality and NIM guidance for

FY17; expecting a new CEO in March Upgrade to BUY on higher NIM assumption and

positive asset quality trends. TP raised to Rp13,600

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F

Pre-prov. Profit 47,755 49,449 54,855 61,122 Net Profit 26,196 29,123 32,368 36,479 Net Pft (Pre Ex.) 26,196 29,123 32,368 36,479 Net Pft Gth (Pre-ex) (%) 3.1 11.2 11.1 12.7 EPS (Rp) 1,072 1,191 1,324 1,492 EPS Pre Ex. (Rp) 1,072 1,191 1,324 1,492 EPS Gth Pre Ex (%) 3 11 11 13 Diluted EPS (Rp) 1,072 1,191 1,324 1,492 PE Pre Ex. (X) 11.3 10.1 9.1 8.1 Net DPS (Rp) 321 357 397 0.0 Div Yield (%) 2.7 3.0 3.3 0.0 ROAE Pre Ex. (%) 20.2 18.4 17.8 17.6 ROAE (%) 20.2 18.4 17.8 17.6 ROA (%) 2.8 2.7 2.7 2.7 BV Per Share (Rp) 5,989 6,946 7,913 9,008 P/Book Value (x) 2.0 1.7 1.5 1.3 Earnings Rev (%): 2 2 N/A Consensus EPS (Rp): 1,162 1,291 1,238

Other Broker Recs: B: 23 S: 4 H: 8

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Gaining momentum Better-than-expected KUR schemes; branchless banking on the move; upgrade to BUY with new TP of 13,600. With potential Kredit Usaha Rakyat (KUR) schemes better than what we previously expected, NIM should be more steady vs our previous assumption. We also noted that its existing micro product, Kupedes, did not suffer significantly from the cannibalisation of KUR loans, thus adding stability to NIM. Our NIM forecasts for FY17-18F are sequentially raised to 7.6-7.7% (from 7.4-7.5%). Further inroads for its branchless banking initiatives are expected to further raise e-banking-related fees. All in, we raise our FY17-18F earnings by 2% each year. The prospects of its asset quality have improved and its high capital levels could point towards an increased dividend payout. FY16 ended on a strong note despite challenges. BBRI showed a decent set of earnings for FY16 despite headwinds in making additional provisions to ensure reserves are sufficiently buffered given concerns over asset quality. NIM rose contrary to expectations. Loans grew strongly at 14%, driven by micro loans. Fee income was also strong thanks to strong e-banking-related fees which increased 37% y-o-y. Conservative guidance for 2017. Management is guiding for 2%-5% net profit growth in FY17 despite the respectable loan growth target of 12%-14% (higher than the industry which is expected to grow at 10%-12%). The lower growth at the bottomline is mainly due to slightly lower NIM and higher credit cost. Opex growth is also expected to be at 15%-18% as the bank continues to build up its Electronic Data Capture (EDC) for the BRI Link branchless banking initiative. NPL is guided higher at 2.2%-2.4% mainly due to management’s conservative stance. Apart from loan growth which we assumed at 14%, our forecasts are ahead of management guidance, with FY17-18F earnings above consensus. Valuation:

We upgrade BBRI to BUY with new TP of Rp13,600. Our TP is

based on the Gordon Growth Model (18% ROE, 10% growth and

14.4% cost of equity). Micro loans will continue to drive growth.

Key Risks to Our View:

Regulatory risks remain an overhang. Although the KUR rates did

not drop to 7%, risk remains for a potential cut in KUR rates as it

is part of the national agenda to ensure such loans become

affordable as a means for financial inclusion. A cut in KUR loan

yields could pose downside risk to our earnings forecasts. At A Glance Issued Capital (m shrs) 24,669

Mkt. Cap (Rpbn/US$m) 297,880 / 22,363

Major Shareholders (%)

Govt of Indonesia (%) 59.0

Free Float (%) 41.0

3m Avg. Daily Val (US$m) 18.1

ICB Industry : Financials / Banks

DBS Group Research . Equity

14 Feb 2017

Indonesia Company Guide

Bank Rakyat Indonesia Version | Bloomberg: BBRI IJ | Reuters: BBRI.JK Refer to important disclosures at the end of this report

73

93

113

133

153

173

193

213

5,715.0

6,715.0

7,715.0

8,715.0

9,715.0

10,715.0

11,715.0

12,715.0

13,715.0

Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Relative IndexRp

Bank Rakyat Indonesia (LHS) Relative JCI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Bank Rakyat Indonesia

WHAT’S NEW

Gaining momentum

Highlights:

Regulatory overhangs on KUR remains, but impact to

earnings is limited. BBRI is still unable to confirm details on

the new KUR scheme. What is known is that the KUR rate is

still at 9% and the credit insurance premium is raised to

1.75% from 1.5%. The amount of interest subsidy by

government (currently at 10%), however, is still an overhang.

The co-ordinating Ministry of Economic Affairs previously

hinted at a 45bps interest subsidy cut (to 9.55% from 10%)

but BBRI’s management previously indicated the subsidy will

likely be unchanged.

Our sensitivity analysis suggests that the potential change in

interest subsidy has little impact on earnings. Assuming the

scenario with interest subsidy lowered at 9.55% (from 10%),

FY17 net profit will be lowered by 1%.

Furthermore the new KUR scheme also requires BBRI to

disburse loans to the production sectors such as paddy & fish

farming and basic manufacturing. BBRI’s management

indicated that the government has targeted an achievable

40% KUR disbursement to these production sectors (from

currently c.30%). Refer to Chart 1 and Chart 2.

Better-than-expected KUR scheme in 2017 provides upside to

our FY17-18 NIM and earnings forecasts. The scenario laid

out to date is better than our previous forecast of 200bps cut

in KUR yield. With the current worst case scenario KUR yield

would be lowered by only 70 bps (25bps higher on insurance

premium and 45 bps lower on interest subsidy) instead of

200bps. This provides upside to our NIM and earnings

forecast. Our NIM forecast is raised from 7.4-7.5% to 7.6-

7.7%.

Soft cannibalisation of Kupedes due to product differences.

Kupedes loan balance still grew by 7% y-o-y, easing the

concern that the existing Kupedes customer will be

cannibalised by the lower yielding KUR. We believe the

cannibalisation impact is limited by the slow disbursement of

retail KUR loans which should compete head to head with

Kupedes, as both has ticket size of Rp200m. KUR Micro, on

the other hand, has a ticket size of Rp25m and will only

cannibalise the smaller fragment of Kupedes customers

(Kupedes loan with a ticket size of below Rp25m). Refer to

Chart 3 and 4. This explains why, despite the increasing

balance of Kupedes loans, the number of Kupedes customers

declined to 4m from 4.4m.

How much cannibalisation affect loan yield?

Our analysis suggest that the current KUR scheme should only

lower asset yield by 8bps and NIM by 6bps compared to FY16

(refer to Chart 9). Therefore, we believe that the overall

impact of cannibalisation is still manageable.

Building up NPL coverage up to the normal level. We believe

that the management is prioritizing on building up the

coverage ratio to reach normal levels. The ratio was well

above 200% during the upcycle phase between 2012 and

2014 but down to c.150% during the downturn cycle. BBRI’s

management offered a conservative earnings growth

guidance of 3-5%, mainly on the back of higher credit cost

assumption of 2.2%-2.4% (higher than FY16 at c.2.0%).

Refer to Chart 5. We expect ROE uplift might be visible once

BBRI reach comfortable levels for coverage ratio and lower

credit costs.

Branchless banking initiatives gain traction. BRILink agents

reached 84.550 in 4Q16, with the transaction value per agent

more than doubling to Rp1.6m (vs previously 714K in 4Q15).

This could lay a strong foundation for fee income, deposits, and

lending for the future. Going forward, management is targeting

30k-40k new agents this year. Refer to Chart 6.

BBRI, the main proxy for micro lending. The micro lending

landscape has changed significantly after the new KUR scheme

came into play in Aug 2015. This has made it more challenging

for other banks to stay competitive in the micro lending business.

We believe BBRI will continue to have a natural advantage in

micro lending given its historical track record in this area. Barriers

to entry for micro lending are not high but the ability to sustain

profitability in this business will be a challenge for most players.

Earnings uplift for FY17-8F from NIM. We adjusted our NIM

forecast following the unchanged KUR rate at 9% (we

previously assume KUR rate to drop to 7%). This translates

into higher earnings forecast of 2% each in FY17F and FY18F

respectively

New CEO in March; will this trigger a kitchen-sinking

exercise? We are expecting a new CEO to be appointed in

March 2017 (at the AGM). Historically, most of BBRI’s CEOs

have come from external sources (except for the current CEO)

and therefore an external CEO should not be an issue for

BBRI. Refer to Chart 10. We do not expect a significant

kitchen-sinking exercise to take place under the new CEO, as

BBRI’s corporate segment has already baked in the bad news

with an NPL of 5.61% (vs 4.78% in 2015).


Company Guide


Guiding for positive NPL trend in 1Q17; conservative outlook

throughout the year. Management is expecting an upgrade

of some big corporate accounts in 1Q17. Management stated

that it has found a solution for these companies and is

expecting an upgrade and payment of deferred interest

income to materialise in 1Q17.

However, NPL for the full year is guided higher at 2.2%-2.4%

(vs currently at 2.1) mainly due to management’s conservative

stance. Credit cost is also expected to remain elevated this

year at 2.2-2.4% due to its intention to build up coverage.

High opex growth expected; expand EDCs but less ATM

additions. Opex growth is also expected to be high at 15%-

18% as the bank continues to build up its Electronic Data

Capture (EDC) for the BRI Link branchless banking initiative.

BBRI intends to continue to expand EDC to support its

branchless banking initiative. Management is targeting 30k-

40k new agents to be equipped with EDC. There may be

lower ATM additions on the other hand, due to the

government’s programme to integrate the infrastructure

network of SOE banks as part of the Himbara (Himpunan

Bank Milik Negara) initiatives.

Slight improvement in earnings growth expected.

Management is guiding for 2%-5% net profit growth in

FY17, despite the respectable 12-14% loan growth. The

lower growth at the bottomline would mainly be due to

slightly lower NIM and higher credit cost.

Higher payout on the cards. A higher dividend payout may be

on the cards given its high capital ratios. BBRI could also

follow Bank Mandiri’s footsteps towards delivering a higher

dividend payout. The dividend payout decision will likely be

discussed at its upcoming AGM and with the Ministry of SOE.

FY16 results review:

FY16 earnings were in-line. Bank Rakyat Indonesia’s (BBRI)

FY16 net profit of Rp26.23tr (+3.2%y-o-y) was 4% above our

full-year estimate and 2% above consensus’. On a quarterly

basis, earnings were stronger at Rp7.3tr (+4.7% q-o-q).

Strong loan growth, higher net interest income (NIM), and

higher fee income were offset by higher provision expenses.

Robust loan and deposit growth. This was driven by robust

loan growth of 14.2% y-o-y due to strong disbursements of

micro loans (+18.2% y-o-y). Corporate loans and consumer

loans also grew by a respectable 13.1% and 13.8% y-o-y

respectively. Elsewhere deposits grew 12.8% y-o-y, driven by

CASA growth. CASA ratio improved to 59% (from 57.8%

last year) and this helped to lower the cost of funds.

NIM improved due to lower cost of funds. NIM improved to

8.1% from 7.9% a year ago mainly on lower cost of funds,

which declined to 3.8% (from 4.2% in 2015). Demand

deposits in 4Q16 spiked 22% q-o-q mainly due to additions

in government account, but this is expected to normalise in

1Q17.

Asset quality in check. Non-performing loans (NPLs) was

flattish at 2.03% (vs 2.02% a year ago). NPLs for micro,

consumer, and small commercial loans improved but some

downgrades were noted in the medium and corporate non-

SOE segments.

Strong fee income growth. Fee income grew strongly at

24%, driven by strong e-banking related fees which increased

37% y-o-y. This was partly due to the strong traction from

the branchless banking initiatives and additional servicing fees

in the small commercial and medium segments. The bank had

introduced a new product which offers c.9% interest rate to

comply with the single-digit lending rate initiative. However,

BBRI has imposed additional servicing fees to offset the low

rate. Elsewhere, asset recovery was strong in 4Q, growing

43% q-o-q, which helped to lift overall non-interest income

by 22% y-o-y

Branchless banking is on the move. One of the reasons for

the strong e-banking related fees is due to strong traction

from BRI Link, the branchless banking initiative. The number

of agents increased from 50K by the end of 2015 to 84K by

the end of 2016, while the number of transactions and

transaction value increased four-fold y-o-y.

Valuation and recommendation

Upgrade to BUY, TP lifted to Rp13,600. We are turning

positive on BBRI on the back of better NIM prospects than we

initially anticipated, thanks to the KUR rates and a lesser

extent of micro loan cannibalisation. Despite the conservative

management guidance, we believe NPLs have peaked and

credit costs should decline. Our higher NIM assumptions lead

to higher earnings by 2% each year for FY17F and FY18F.

Imputing this, our TP rises to Rp13,600. Our TP is based on

the Gordon Growth Model (18% ROE, 10% growth and

14.4% cost of equity). Micro loans will continue to drive

growth.

ROE is still the main driver for re-rating. With the absence of

uncertainty related to the KUR programme this year, all eyes

will focus on the new management and whether this will

trigger kitchen-sinking exercises. Lower provisions in the few

years to come should be the main driver for ROE uplift and

therefore a PBV re-rating in the future. Refer to Chart 7.


Company Guide


Chart 1: KUR disbursement target

KUR Type FY17

Target FY16

Disbursement

Industry (Rp tr)

BBRI (Rp tr)

BBRI (Rp tr)

KUR Micro 71 61.5 61

KUR Retail 35 9.5 8

Total KUR 106 71 69

Chart 2: KUR disbursement by economic sector in 2016

Note : Data as of November 2016

Chart 3: KUR disbursement by economic sector in 2016

Loan Type Ticket Size Collateral Rate

KUR Micro Up to Rp25m No 9%

KUR Retail Up to 200m in units Up to 500m in branches

No 9%

Kupedes Up to 200m Yes 18%-25%

Chart 4: Changes in micro loan portfolio

Chart 5: Coverage ratio and credit costs

Chart 6: BRILink branchless banking initiative

Chart 7: ROE vs PBV multiple

Source: Coordinating Ministry of Economic Affairs, Companies, Bloomberg Finance L.P, DBS Bank, DBS Vickers

16.36%

1.17%4.25%

67.31%

10.91%

Farming, Forestry, Hunting Fisheries

Manufacturing Trading

Services

145.5 155.7

12.7

5120.7

4.8

0

50

100

150

200

250

2015 2016

Balance

Kupedes New Micro KUR Others

Rp tr Million

4.4 4

0.9

4.12.6

0.8

0

1

2

3

4

5

6

7

8

9

10

2015 2016

Number of Customers

177%

0%

1%

1%

2%

2%

3%

3%

0%

50%

100%

150%

200%

250%

300%

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

Coverage Ratio Credit Cost - RHS

Normal coverage level of 200%

Downtrun cycle and reparing phase

Upycle phase

50

24 36

59

15 21

65

35

51

70 60

88 85

98

139

-

20

40

60

80

100

120

140

160

Agents

(Ths)

Transaction Volume

(mn)

Transaction Value

(Rp tr)

4Q15 1Q16 2Q16 3Q16 4Q16

68.2%

y-o-y

317%

y-o-y

288%

y-o-y

Transaction value/agents rose to Rp1.6mn in 4Q16 vs 714K in 4Q15

1.8

2.3

2.8

3.3

3.8

4.3

15%

20%

25%

30%

35%

40%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

ROE PBV - RHS


Company Guide


Chart 9: How much cannibalisation affect loan yield?

Bank only loan composition

Loan Outstanding 2014 2015 2016 2017F

Portion in 2016

Portion in 2017

Growth y-o-y Notes

Kupedes 128,800 145,500 155,700

166,599

25% 23% 7% Expect Kupedes to grew moderately at 7%

Kupedes Rakyat 0 15,120 4,200 Kupedes Rakyat Stop

Micro KUR 24,500 5,500 600 Old Micro Stop

New KUR (Micro and Retail)

0 12,700 51,000 96,500 8% 13% 89% KUR disbursement of Rp71tr; half of the balance in 2016 will mature

Total Micro 153,300 178,820 211,500

263,099

33% 36% 24% Sum of Micro

Non Micro 365,700 379,580 423,800

461,143

67% 64% 9%

Total Loan 519,000 558,400 635,300

724,242

100% 100% 14% Assuming 14% Loan Growth in 17F

Bank only loan composition

Interest Rate Assumption 2014 2015* 2016 2017F

Kupedes

20.5% 20.5% 20.5%

Kupedes Rakyat

26.0% 26.0%

Micro KUR

22.0% 22.0%

New KUR (Micro and Retail) 19.0% 19.0% 18.55%

Total Micro

22.7% 20.6% 19.7%

Non Micro

10.5% 10.5% 10.5%

Blended Loan Yield 13.99% 13.78% 13.70% *Rate of the Micro Products from company guidance

Total Micro, Non Micro, and Asset Yield based on our own calculation

Chart 10: BBRI past CEOs

CEO Tenure Previous Institution Previous Position

Asmawi Syam 2015-2016 Bank BRI Director of Institutional Business and SOE

Sofyan Basir

2005-2015 Bank Bukopin CEO

Rudjito 2000-2005 Bank Dagang Negara Director

Djoko Santoso 1993-2000 Bank Eksim N/A

Source: Various websites and media releases

KUR portion to increase to 13% (from 8%) assuming Rp71tr of new KUR disbursed in 2017.

Cannibalisation was soft. Kupedes still growing at 7% despite the aggressive disbursement of KUR.

Mild negative impact on blended loan yield. 8bps decline on lending yield due to lower interest subsidy


Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq FY2015 FY2016 % chg yoy

Net Interest Income 16,704 18,047 17,518 4.9 (2.9) 58,280 67,576 16% Non-Interest Income 3,868 3,398 5,683 46.9 67.2 12,409 17,278 39%

Operating Income 20,572 21,445 23,201 12.8 8.2 70,689 84,854 20% Operating Expenses (8,053) (8,929) (8,455) 5.0 (5.3) (31,276) (37,098) 19%

Pre-Provision Profit 12,519 12,516 14,746 17.8 17.8 39,413 47,755 21% Provisions (2,008) (4,137) (2,315) 15.3 (44.0) (8,900) (13,791) 55% Associates 0.0 0.0 0.0 nm nm 0.0 0.0 Exceptionals 0.0 0.0 0.0 nm nm 0.0 0.0

Pretax Profit 11,267 8,612 11,351 0.7 31.8 32,494 33,974 5% Taxation (4,141) (1,009) (2,802) (32.3) 177.7 (7,083) (7,746) 9% Minority Interests 0.0 0.0 0.0 nm nm (13.0) (32.2) 148%

Net Profit 7,126 7,603 8,549 20.0 12.4 25,398 26,196 3%

Growth (%)

Net Interest Income Gth 13.7 8.2 (2.9)

Net Profit Gth 10.9 28.6 12.4

Key ratio (%)

NIM 7.8 8.8 8.1

NPL ratio 2.0 2.2 1.9

Loan-to deposit 86.9 90.7 87.9

Cost-to-income 39.1 41.6 36.4

Total CAR 20.6 21.9 22.7

Source of all data: Company, DBS Bank


Company Guide


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Micro driven loan growth. Micro loans continue to be resilient

while cautious on the small commercial and medium segment

loans. We forecast FY17F loan growth at 14%, driven mainly by

micro loans, especially KUR loans and corporate loans

Normalising NIM

BBRI should see lower NIM from the unusually high NIM in 2016

as the benefits of a lower interest rate environment in 2016

should fade. Interest rates especially from the corporate loans

should adjust lower while cost of funds should hit rock bottom.

A higher policy rate in 2016 can also drag NIM further, as cost

of funds usually adjust faster than loan yields.

Regulatory overhang on KUR

For 2017, KUR rate is still at 9% and the credit insurance

premium is raised to 1.75% from 1.5%. The amount of

interest subsidy by government, however, is still an overhang.

The co-ordinating Ministry of Economic Affairs was previously

talking about a 45bps interest subsidy cut (to 9.55% from

10%) but BBRI’s management previously indicated the subsidy

will likely be unchanged.

Positive asset-quality trends to continue. Its blended NPL ratio is

flattish in 2016, with the NPL ratio in the micro segment diving

below 1%. Note that this is the lowest NPL ratio in micro

segment in the past five years. The risk of NPL and provision

expenses should come from the medium- and corporate

segments.

Maintaining strong fee income growth. Approximately 50% of

BBRI’s fee-based income comes from loan and deposit fees.

BBRI plans to grow its e-channel initiatives, mainly ATMs. It also

needs to improve its credit card services but it is hard for micro

customers to adopt credit cards.

Rolling out branchless banking initiative. BBRI is riding on its

experience and existing infrastructure in micro mass market

loans to expand its branchless banking operations. BBRI is

targeting additional 30K-40K agents in 2017 (84,550 in 2015).

Agents are able to offer a basic savings account product and

transaction banking services, and refer customers to a BBRI unit

for lending products. It will also add to CASA in the long term.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

7.2%

7.4%

7.6%

7.8%

8.0%

8.2%

8.4%

8.6%

8.8%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2015A 2016A 2017F 2018F 2019F

Rp bn

Net Interest Income Net Interest Income Margin

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2015A 2016A 2017F 2018F 2019F

Rp bn

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

200,000

400,000

600,000

800,000

1,000,000

2015A 2016A 2017F 2018F 2019F

Rp bn

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

75%

77%

79%

81%

83%

85%

87%

89%

91%

93%

507,222

607,222

707,222

807,222

907,222

1,007,222

1,107,222

1,207,222

2015A 2016A 2017F 2018F 2019F

Rp bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

0.41

0.42

0.43

0.44

0.45

0.46

0.47

0.48

0

20,000

40,000

60,000

80,000

100,000

2015A 2016A 2017F 2018F 2019F

Rp bn

Net Interest Income Non-interest Income Cost-to-income Ratio


Company Guide


Balance Sheet:

Balancing its funding mix. BBRI wants to diversify its funding

composition and match the maturity of its assets and liabilities.

It has plans to issue up to Rp8tr of bonds to help ease its

liquidity position. BBRI also wants to improve its CASA ratio to

60% by optimising CASA marketing agents and improving its

services by adding branches and rolling out branchless banking

agents. LDR is stretched at above the 90% level and BBRI is

expecting the recent bond issuance to help ease its liquidity

situation.

Improvements in business process to improve asset quality. BBRI

will improve its underwriting processes to improve asset quality.

The bank will create a special task force to tackle NPL and

special-mention loans. It will also limit loans to small- and

medium-sized players, focusing on certain quality debtors and

industries. BBRI will also place experienced personnel from its

head office to regional offices to improve its business processes.

The majority of the problems in its NPL stem from the small

commercial and medium segments.

Strong capital position. BBRI’s CAR remains healthy at above

20%, thanks to the asset revaluation exercise done in June

2016. The high capital ratio provides some rooms to increase

the dividend payout going forward.

Share Price Drivers:

Lower credit costs and asset quality trends. Provision expenses

would be the main driver for ROE and therefore valuation going

forward. Coverage ratio is near the normal 200% level but the

new CEO, which will come on board this year, might fuel

concerns of kitchen sinking.

Key Risks:

Regulatory pressure. The KUR scheme is negotiated on an

annual basis and therefore might cause jitters to the stock

price. Government initiatives to form a superholding company

might also cause uncertainties.

Asset-quality issues. Asset quality in the medium and corporate

segment remains under pressure and might continue to

deteriorate if the economy remains weak.

Company Background

BBRI is Indonesia's leading micro lender, mainly to retail clients

largely in the rural areas. The bank also has a comparatively

small but growing corporate business. It is currently a 59%

government-owned operating company.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio Provision Charge-Off Rate

18.0%

18.5%

19.0%

19.5%

20.0%

20.5%

21.0%

21.5%

22.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

5.0%

10.0%

15.0%

20.0%

2015A 2016A 2017F 2018F 2019F

Avg: 9.9x

+1sd: 11x

+2sd: 12.2x

-1sd: 8.7x

-2sd: 7.6x

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0


(x)

Avg: 2.57x

+1sd: 2.97x

+2sd: 3.37x

-1sd: 2.16x

-2sd: 1.76x

1.5

2.0

2.5

3.0

3.5


(x)


Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Gross Loans Growth 13.8 13.8 14.0 14.0 14.0

Customer Deposits Growth 7.5 12.8 13.2 14.0 14.0

Yld. On Earnings Assets 11.6 11.5 11.1 11.0 11.0

Avg Cost Of Funds 4.0 3.6 3.6 3.6 3.6

Income Statement (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Interest Income 58,280 67,576 72,731 80,896 90,387

Non-Interest Income 12,409 17,278 20,069 22,878 26,081

Operating Income 70,689 84,854 92,800 103,774 116,469

Operating Expenses (31,276) (37,098) (43,351) (48,919) (55,347)

Pre-provision Profit 39,413 47,755 49,449 54,855 61,122

Provisions (8,900) (13,791) (13,761) (15,190) (16,418)

Associates 0.0 0.0 0.0 0.0 0.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 32,494 33,974 37,770 41,978 47,311

Taxation (7,083) (7,746) (8,611) (9,571) (10,787)

Minority Interests (13.0) (32.2) (35.8) (39.8) (44.9)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 25,398 26,196 29,123 32,368 36,479

Net Profit bef Except 25,398 26,196 29,123 32,368 36,479

Growth (%)

Net Interest Income Gth 13.3 16.0 7.6 11.2 11.7

Net Profit Gth 4.9 3.1 11.2 11.1 12.7

Margins, Costs & Efficiency (%)

Spread 7.6 7.9 7.4 7.4 7.3

Net Interest Margin 7.9 8.2 7.7 7.6 7.6

Cost-to-Income Ratio 44.2 43.7 46.7 47.1 47.5

Business Mix (%)

Net Int. Inc / Opg Inc. 82.4 79.6 78.4 78.0 77.6

Non-Int. Inc / Opg inc. 17.6 20.4 21.6 22.0 22.4

Fee Inc / Opg Income 10.4 10.9 11.0 11.3 11.4

Oth Non-Int Inc/Opg Inc 7.1 9.5 10.6 10.8 11.0

Profitability (%)

ROAE Pre Ex. 24.1 20.2 18.4 17.8 17.6

ROAE 24.1 20.2 18.4 17.8 17.6

ROA Pre Ex. 3.0 2.8 2.7 2.7 2.7

ROA 3.0 2.8 2.7 2.7 2.7


NIM is expected to normalise after unusually high levels in 2016

Significantly lower ROE due to asset revaluation in 2016. Management might increase DPR to improve ROE given high CAR position

Expect modes loan growth of 14%


Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Net Interest Income 16,704 15,326 16,685 18,047 17,518

Non-Interest Income 3,868 3,311 4,287 3,398 5,683

Operating Income 20,572 18,637 20,972 21,445 23,201

Operating Expenses (8,053) (8,025) (9,721) (8,929) (8,455)

Pre-Provision Profit 12,519 10,612 11,251 12,516 14,746

Provisions (2,008) (3,589) (3,750) (4,137) (2,315)

Associates 0.0 0.0 0.0 0.0 0.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax Profit 11,267 7,596 7,784 8,612 11,351

Taxation (4,141) (1,459) (1,874) (1,009) (2,802)

Minority Interests 0.0 0.0 0.0 0.0 0.0

Net Profit 7,126 6,137 5,910 7,603 8,549

Growth (%)

Net Interest Income Gth 13.7 (8.2) 8.9 8.2 (2.9)

Net Profit Gth 10.9 (13.9) (3.7) 28.6 12.4

Balance Sheet (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F

Cash/Bank Balance 137,260 164,663 189,393 213,655 249,507

Government Securities 4,661 4,876 5,949 6,894 8,015

Inter Bank Assets 11,800 5,350 5,618 5,899 6,194

Total Net Loans & Advs. 563,580 638,544 724,932 824,975 940,450

Investment 125,143 131,485 141,018 151,504 163,038

Associates 0.0 0.0 0.0 0.0 0.0

Fixed Assets 8,039 24,515 37,605 49,112 59,038

Goodwill 0.0 0.0 0.0 0.0 0.0

Other Assets 27,943 34,212 31,647 33,213 32,877

Total Assets 878,426 1,003,644 1,136,161 1,285,252 1,459,119

Customer Deposits 668,995 754,526 853,986 973,544 1,109,840

Inter Bank Deposits 11,165 2,230 6,697 4,463 5,580

Debts/Borrowings 46,058 60,818 66,069 74,121 83,783

Others 39,081 39,259 39,170 39,214 39,192

Minorities 294 391 427 467 512

Shareholders' Funds 112,833 146,421 169,813 193,443 220,212

Total Liab& S/H’s Funds 878,426 1,003,644 1,136,161 1,285,252 1,459,119


Seasonally low provision expenses in 4Q

Expecting 14% loan growth


Company Guide


Financial Stability Measures (%)

FY Dec 2015A 2016A 2017F 2018F 2019F

Balance Sheet Structure

Loan-to-Deposit Ratio 84.2 84.6 84.9 84.7 84.7

Net Loans / Total Assets 64.2 63.6 63.8 64.2 64.5

Investment / Total Assets 14.2 13.1 12.4 11.8 11.2

Cust . Dep./Int. Bear. Liab. 93.6 92.5 92.8 92.9 93.0

Interbank Dep / Int. Bear. 1.6 0.3 0.7 0.4 0.5

Asset Quality

NPL / Total Gross Loans 1.9 1.9 1.9 1.8 1.7

NPL / Total Assets 1.3 1.2 1.3 1.2 1.1

Loan Loss Reserve Coverage 155.7 181.2 197.7 218.1 231.0

Provision Charge-Off Rate 1.5 2.1 1.8 1.8 1.7

Capital Strength

Total CAR 19.8 21.8 21.6 21.5 21.2

Tier-1 CAR 18.7 18.6 18.6 18.8 18.7


Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Benedictus Agung SWANDONO

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 15 Feb 16 11875 10900 HOLD

2: 19 Feb 16 11450 10900 HOLD

3: 07 Mar 16 11400 10900 HOLD

4: 11 Apr 16 10475 10900 HOLD

5: 29 Apr 16 10350 10900 HOLD

6: 19 May 16 9675 10900 HOLD

7: 04 Jul 16 10750 10900 HOLD

8: 14 Jul 16 11375 10000 HOLD

9: 03 Aug 16 11650 11000 HOLD

10: 15 Aug 16 12000 11000 HOLD

11: 26 Oct 16 12075 12000 HOLD

12: 15 Nov 16 11025 12000 HOLD

13: 13 Dec 16 11725 12200 HOLD

14: 01 Feb 17 11950 12200 HOLD

Note : Share price and Target price are adjusted for corporate actions.

12

3

4

5 6

7

8

9

10

11

12 13

14

9048

9548

10048

10548

11048

11548

12048

12548

13048

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

Rp

Expect NPL trends to be stable. However, we continue to impute a conservative credit cost scenario.


Company Guide


DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 14 Feb 2017 09:37:21 (WIB) Dissemination Date: 14 Feb 2017 09:38:58 (WIB)

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,

its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated

in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal

or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no

obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED

UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.


Company Guide


ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. As of 14 Feb 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold

interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)

responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and

procedures are in place to ensure that confidential information held by either the research or investment banking function is handled

appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 31 Jan 2017.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

3. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from Bank Rakyat Indonesia as of 1 Jan 2017.

4. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for

Bank Rakyat Indonesia in the past 12 months, as of 1 Jan 2017.

5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

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For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.


Company Guide


Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3

rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),

Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

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