Indonesian Banks - YTD Jul-24 Summary

YTD Jul-24 Summary

Major Indonesian banks (BBCA/BMRI/BBRI/BBNI) have published their bank-only Jul-24 results, which broadly showed some earnings stability (and thus improved earnings visibility). Specifically, funding costs have been stable (although liquidity in the banking system stays tight). Indeed, the average monthly CoF of these major banks has been hovering at ~2.5-2.6% (p.a.). With stable funding costs, we think net interest margin (NIM) risks for these banks, which have been on a downtrend particularly in the recent years, may be largely behind us. And with potential maturing SRBIs in 4Q24, we anticipate some liquidity injection in the banking sector. And combined with projected BI rate cuts, we think funding costs for major banks could remain stable. As of Jul-24, the average monthly NIM of major banks continued to rise to 5.5% from a low of 5.1% in Feb-2024/Apr-2024. These should provide some earnings visibility for these banks, thereby reducing downside risks — one of the key catalysts for their near-term share price performance, in our view. If stable funding costs are sustained and considering loan growth trajectory, this would suggest better NII growth (and thus better earnings trends without having to drive down CoC).

Based on the results from these major banks, BBCA and BMRI continue to be our preferred banking stocks. Both BMRI and BBCA have continued to see superior loan growth (primarily driven by their corporate customers as well as better funding costs, particularly on saving deposits). Indeed, YTD Jul-24, BMRI has demonstrated most visible growth in current account and saving deposits. These suggest that its strategy to capture business downward value chains may have been successful in capturing low funding costs.

We also think that BBRI, the share price of which has declined by ~25% from its peak of IDR6,400 in March 2024 (vs the JCI’s gain of 3% during the same period) , may see its earnings bottom out (despite credit costs remaining elevated). The bank has also kept a prudent provisioning approach to reduce credit risks at its mass-market (micro) segment as well as bringing down micro loan growth to a healthy level of mid-single digit percentage. A key challenge for BBRI is extremely slow deposit growth at its micro / ultra-micro customer base. Our assessment suggests that much of these could be due to leakages in deposits whereby after loan disbursements, BBRI’s micro borrowers may have to pay their obligations (for working capital purposes) which resulted into deposit outflow. Thus, the key challenge for BBRI would be how to capture upward-value chains of its micro ecosystems, which in our opinion may require the bank to expand its corporate loan exposures. Meanwhile, the expected BI rate cuts augurs well for BBNI and BBRI given that they have proportionally more fixed rate earnings assets than BBCA/BMRI.

Summary of YTD Jul-2024 results

Below is a summary of major banks’ YTD Jul-24 results. While we still see largely tight liquidity in the banking system, we have seen a more stable funding cost trend (hence NIMs). While still in early days, we think near-term funding costs could remain largely unchanged, and these could become near-term earnings drivers for the banks.

1. YTD Jul-24 net interest income from major banks +3% y-y

BBCA +9% y-y
BBRI +4% y-y
BMRI +4% y-y
BBNI -8% y-y

2. YTD Jul-24 PPOP from major banks +10% y-y

BBRI +18% y-y
BBCA +11% y-y
BMRI +6% y-y
BBNI -6% y-y

3. YTD Jul-24 CoC for major banks at 1.5% (+10bp y-y)

BBRI CoC of 3.7% (+180bp y-y) — as BBRI is writing off NPLS in small and/or micro segments
BBNI CoC of 0.9% (-60bp y-y)
BMRI CoC of 0.7% (+20bp y-y)
BBCA CoC of 0.1% (+40bp y-y)

4. YTD Jul-24 implied risk-adj NIM for major banks at 4.3%

BBCA 5.6% (+30bp y-y) as NIM @ 5.8% (+20bp y-y)
BMRI 4.1% (-20bp y-y) as NIM @ 4.0% (-20bp y-y)
BBRI 4.1% (-90bp y-y) as NIM @ 6.4% (-20bp y-y)
BBNI 3.2% (-30bp y-y) as NIM @ 3.9% (-60bp y-y) due to persistent loan mispricing but higher funding costs

5. YTD May-2024 profits for major banks +6% y-y

BBCA +12% y-y
BMRI +7% y-y
BBNI +3% y-y
BBRI +2% y-y

On balance sheet, loan growth was up +14% y-y; +7% YTD Jul-24 (+21% y-y (+11% YTD Jul-24) for BMRI; +14% y-y (+6% YTD Jul-24) for BBCA; +9% y-y (+5% YTD Jul-24) for BBRI; +11% y-y (+4% YTD Jul-24) for BBNI). On deposits, overall deposits were up 9% y-y (and +1% YTD Jul-24) with BMRI +13% (+4%) / BBRI +13% (+2%) / BBCA +4% (+2%) / BBNI +2% (-8%). A closer examination shows that the more important Saving Deposits (than Current Account or Time deposits) still recorded healthy growth of +6% y-y (+4% YTD Jul-24) with BMRI posting the highest growth of +12% y-y (+8%) / BBCA +5% (+5%) / BBNI +5% (+3%) / BBRI +2% (-1%). These explain that among the major banks, BBCA / BMRI / BBRI show the most stable NIMs. Headline LDR for these banks remained at 89.2% in Jul-24 (a slight uptick from 84.1% in Dec-2023)

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 new 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 TP of IDR6,100 using DuPont methodology with risk-free of 6.5%, an equity risk premium of 7.8%, growth rate of 8.5% and a CAR-adjusted ROAE of 16.5%. We have also used the FY24F book as reference to derive our TP. At our TP, this implies 1.4x FY24F P/B and 10.9x FY24F PER. Downside risks include worse than expected macroeconomic trends, lack of loan re-pricing, tight liquidity competition and higher credit costs and opex growth.