Bank Rakyat Indonesia (BBRI IJ) (Buy) - Micro: Not worsening, but recoveries take time

Micro: Not worsening, but recoveries take time

We hosted BBRI’s head of micro business division for a discussion on the bank’s micro segment outlook for 2025. Overall, the bank sees improvements in its micro segment, which could limit downside risks from lingering issues at the bank’s micro segments. Consequently, while we see limited near-term catalysts for the stock and/or the broader market, we see limited earnings risks on the stock as well. Some notable improvements at micro are :

Monthly NPL formation rate was at ~IDR1.6tn during Oct-Nov24 (improving from ~IDR2.3tn per month in 1H24 in 2024). Despite the improvement, it suggests that the run-rate for micro NPL formation was still elevated at >3.0% pa (or approximately ~1.8% of total loans). This would imply that future credit costs (CoC) for bankwide would remain elevated (which we think could be ≥ 3.0% pa). Further out, the bank has not only tightened its loan underwriting, which includes, among others, having higher scoring requirements but also for existing KUR borrowers the maximum amount of loans that a borrower can draw down was kept at 130% of the original disbursements.

SML micro declined from ~7.1% in 1Q24 to ~6.6% Nov24. Despite these improvements, the bank will continue to tighten up its credit scoring system to improve its loan quality further, according to management.

The government has set the KUR (People's Business Credit) disbursement objective for 2025 at IDR300tn, which is the same as the 2024 target. The entire distribution target for BBRI is IDR175.0tn, IDR160.0tn of which will be allocated for the micro segment, which is a minor decrease from 2024’s latest disbursement target of IDR185.5tn. This implies that while KUR micro loans may still increase in 2025, we believe Kupedes (commercial micro) should also see a recovery. Overall, we project blended micro loan growth of ~2.5% in 2025F.

Another notable development during 4Q24 was on deposit growth in the micro segment, which rose from a low of 1.7% y-y in 1H24 to ~3.0% y-y in Nov-24 period. This helped keep micro LDR from rising. The bank has observed that most KUR loan disbursements have resulted in low (if any) deposits/savings. Consequently, the bank aims to capture micro’s upward value chain transactions to keep deposits within the ecosystem. So far, overall micro LDR has remained at ~133% (off the high of ~135% in 2Q24). More encouraging, in our view, is that Kupedes LDR is 100%, suggesting that it remains a self-funded lending business.

On a positive note, management has kept prudent policies whereby its credit costs (CoC) has been kept at a similar rate as the write-off rate. Unlike some of its peers that rely on provision releases (i.e., CoC lower than write-off rates, resulting in depleting LLR), this suggests that when BBRI’s write-off rate drops, we could see a significant CoC decline, and thereby a possible large profit turnaround. We think this could come in 2026-27F.

Still, with stabilizing write-off rates as well as micro loan downgrade rates, we think earnings risks for the bank should be muted.

Valuation and risks

We derive our TP of IDR5,400 based on DuPont analysis with a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 9.3%, 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 2.5x 2025F book and 13.1x 2025F earnings. 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. Changes in management may affect the bank’s write-off policies and thus, credit costs. This would ultimately affect near-term earnings for the bank, which in turn, could put pressure on the share price.