Bank Central Asia BBCA IJ - Buy - Solid YTD Jul-24 results
BBCA’s bank-only Jul-24 earnings of IDR4.9tr (+1% m-m / +17% y-y) brings YTD Jul-24 headline profit to
Following on our recent note on the banking sector (Indonesia Banks) in which we discussed about the easing liquidity of Indonesia’s banking sector in 4Q24, in this note we reaffirm our Overweight (OW) call on the sector to reflect our view of further improving credit risks. This should further enhance Indonesia banks’ earnings visibility in the coming quarters. Specifically, in this note, we look at system-wide loans’ write-off trends. After the sharp drop in write-off formation rates post the pandemic in early 2022, when write-off continued to stay low, we have seen upward trends in write-off in Mar24. Admittedly, the bulk of write-offs come from the mass-market loan portfolio (which can also be seen in BBRI’s recent results). Nonetheless, of late, the write-off trends have flattening at around 1.22-1.23% for the sector (as well as 3.3-3.5% in the recent months for BBRI) - refer to inside charts for details. We think that these trends could persist into 2H24F (and 1H25F). Consequently, in our opinion, earnings risks for banks (in particular for BBRI) should be muted in coming months.
In this note, we present the loan loss reserve (LLR) and 12MMA write-off trends of five of the largest banks in Indonesia (namely BMRI, BBRI, BBCA, BBNI, and BRIS – All Buys). Broadly, we see consistent write-off trends although there are some variations with respect to the decline in write-off from their respective peak. The decline in WO has so far enabled banks to lower their LLRs with some exceptions --- BBRI appears to have taken a more conservative approach. Understandably, this is to reflect the recent increases in write-off for its micro portfolio. Still, we believe BBRI's LLR should moderate in 4Q24F-1Q25F, giving room for earnings recovery.
Meanwhile, both BBCA and BRIS have the lowest write-off trends among banks in our coverage – implying that they can afford to have lower credit costs. On the flip side, BBNI saw some upticks in write-off trends in recent months. Thankfully, the bank has excess provisions (LLR) which it built up during the early days of the pandemic. This has been a key driver for BBNI’s earnings growth, in our view.
Given the above, we retain our OW call on the sector. Our preferred banking stocks are BMRI/BBCA for the long term given their strong transactional franchises, but admittedly in the near term 2H24, we think BBRI could potentially benefit from improving write-off loans. BRIS is also our top pick within the mid-sized banking space. Its dominant position in the syariah banking remains unchallenged, in our view. Moreover, the bank offers one of the highest 3-year (2023-26F) earnings CAGR of ~17%.
Valuations and risks
BBCA — We derive our TP of IDR13,200 using DuPont analysis with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 0.8x and a CAR-adjusted ROAE of 24.5%. Our TP implies 5.4x FY25F P/B (vs current price valuation of 4.2x) and 26.9x FY25F P/E (vs current price valuation of 21.0x). Risks are worsening economic trends, tighter liquidity competition, and/or higher credit cost and opex growth.
BMRI — We derive our TP of IDR8,450 using DuPont methodology. Key parameters are a risk-free rate of 6.5%, an equity risk premium of 7.8%, a CAR-adjusted ROAE of 19.8% and beta of 1.03x. We have also used 2025F book as reference. Our TP implies a 2.5x FY25F P/B and a 12.4x FY25F P/E – compared to current price valuations of a 2.1x FY25F P/B and a 10.6x FY25F P/E. Key downside risks are worse-than-expected macroeconomic trends, government intervention, tight liquidity competition, and higher credit cost and opex growth.
BBRI — We derive our TP of IDR6,300 based on a DuPont analysis, assuming 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 also use 2025F book as reference. The implied multiples at our TP are 2.9x 2025F book and 14.8x 2025F earnings (compared to current multiples of 2.0x and 10.7x, respectively). Key risks to our view are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition (which would increase funding cost), and worsening credit quality (which would raise credit costs), and higher opex.
BBNI — We derive our new TP of IDR6,600 based on a DuPont analysis, assuming a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 8.5%, beta 1.0x and a CAR-adjusted ROAE of 16.5% (all unchanged). We also use 2025F book as reference, rolling forward from 2024F currently. The implied multiples at our TP are 1.4x 2025F book and 10.7x 2025F earnings (compared to current multiples of 1.2x and 9.3x, respectively). Key risks to our view are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition (which would increase funding cost), and worsening credit quality (which would raise credit costs), and higher opex.
BRIS - We derive our TP of IDR3,800 using DuPont methodology, with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 1.2x and a CAR-adjusted ROAE of 18.1% . Our TP implies a 2025F P/B of 3.3x and a 2025F P/E of 22.0x. Risks are worsening macroeconomic trends, unfavorable regulatory changes, tighter liquidity competition that could increase funding costs, worsening credit quality that could raise credit costs, material management changes, and/or persistently high opex.