Bank Rakyat Indonesia BBRI IJ -Buy- A second look

download (0)

A second look

On a YTD basis, BBRI had underperformed its major peers by ~13-30%, with predominantly net foreign selling amounting ~IDR20tn. Understandably, this underperformance reflects concerns about asset quality at BBRI’s micro loan portfolio, particularly following aggressive Kupedes loan growth in 2023. Indeed, as shown in Fig. 1, while in 2023, the total micro (including pawning and ultra micro) loan portfolio grew by ~10% y-y to IDR611tn; Kupedes (commercial micro) rose by a staggering ~64% y-y to IDR212tn. Despite these concerns, we think BBRI deserves a second look.

Necessary measures

In 1H24, BBRI undertook necessary measures to slow micro loan growth. YTD 1H24, total micro loan grew by merely ~2%, whereby both Kupedes and KUR (subsidized micro) were at a slower pace. Much of this slowdown in the Kupedes/KUR portfolio can be attributed to slower disbursements and/or higher write-offs. Fig. 2 shows slowing micro loan disbursements over the past fourquarters (3Q23-2Q24), with 2Q24 approximately at half the highest disbursement in 1Q23. Going into 2025F, we think the bank may continue to slow micro loan growth.

Slowing micro downgrades and/or write-off rates

Moreover, as we have shown in Fig. 3, micro loan downgrades into NPLs appeared to have slowed down from a high 3MMA downgrade of ~4% in Jan24 toward ~2% in Aug24. We have also seen early signs of improving write-off trends for BBRI (refer to Fig. 6). If these improving write-off and/or downgrade trends persist, we think BBRI could lower its credit costs (CoC; in absolute IDR terms). As a percentage of loans, CoC could settle at ~3.2% of loan portfolio in 2024F (slightly lower than YTD Aug24 of ~3.4%). Going into 2025F, we think BBRI could see lower CoC (in absolute IDR terms). Specifically, the bank could provide some provision releases for excess provisions that it had built up during the pandemic period, as BMRI and BBNI (both rated Buy) did in 2023-1H24 which have resulted in declining LLR (refer to Fig. 5).

Better core earnings despite slower loan growth

Fig. 4 compares bank-only results among major banks. As of Aug24, BBRI booked the slowest loan growth of +7% y-y (slower than BMRI +22% / BBCA (rated Buy) +16% / BBNI +9%). Yet, in terms of NII, BBRI booked NII growth of +3% y-y (compared to BMRI +4% / BBCA +9% / BBNI -7%). In addition, in terms of PPOP, BBRI had the highest growth of +16% y-y (in part due to asset recovery) compared to BBCA +12% / BMRI +7% / BBNI -5%. These suggest that BBRI didn’t take on as much credit risk to deliver NII and/or PPOP growth that would compare favorably. We think these reflect that BBRI’s performing loan portfolio has driven core earnings. High CoC for BBRI (declining CoC for BMRI/BBNI) have resulted in profit growth of +4% y-y (BMRI +6% / BBCA +14% / BBNI +4%). Going into 2025F, we think BBRI could deliver a better earnings profile, with a possible downtrend in CoC. This could be a key driver for re-rating for the stock, in our opinion.

Valuation and risks

We derive our TP of IDR6,300 based on DuPont analysis with a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 10.0%, beta 0.8x and a CAR-adjusted ROAE of 18.0%. We have also used 2025F book as reference. The implied multiples at our TP would be 2.9x 2025F book and 14.8x 2025F earnings (compared to current multiples of 2.1x and 11.1x, respectively). Risks are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition, which could increase funding costs, worsening credit quality which would raise credit costs, and higher opex.