We expect liquidity in the Indonesia banking sector to remain tight (although it is not worsening) given the already-high LDRs as well as still-elevated reserve requirements (effectively at ~6-7%). Hence, we believe that within the sector, major banks will continue to dominate. We expect mid-sized banks, such as BTPN, to experience flat/declining market share (either in terms of loans, assets, or profit). Hence, we maintain our Neutral rating and lower TP to IDR2,250 (from IDR2,600), reflecting our raised beta and hence discount rate assumptions. However, we raise our earnings forecasts to incorporate the strong FY24 results.
Earnings changes summary
We raise our earnings estimates for FY25F and FY26F, and introduce FY27F estimates. For FY25F/26F, we raise our earnings by 47.5%-71.3% to factor in its strong FY24 results (Fig. 1). Hence, we estimate a higher NIM of ~8.0% for FY25-26F (up by ~180bp from our previous estimates). However, we expect funding cost risk to remain (reflecting the generally-tight liquidity in the banking system). Meanwhile, credit costs (CoC) in 4Q24 for BTPN slightly increased to 320bp from 310bp in 4Q23, suggesting a worsening asset quality. Hence, we maintain our CoC assumptions for FY25F-26F at 200bps. On the balance sheet, we expect BTPN’s loans to decrease by 6.6% while deposits to grow slightly by ~1.9-4.3% in FY25-26F as we expect major banks to continue dominating.
Valuation and risks
We derive our new TP of IDR2,250 (Fig. 3) based on an unchanged DuPont analysis, assuming a risk-free rate of 6.5%, an equity risk premium of 7.8%, a CAR-adjusted ROAE of 13.0% and a beta of 2.0x (vs 1.5 previously). Our new TP implies 0.4x 2025F PBV and 6.5x 2025F P/E. The stock currently trades at 0.3x 2025F PBV and 5.8x 2025F P/E. Key risks include better/worsening macroeconomic developments, higher/lower loan growth, higher/lower asset yields, lower/ higher deposit rates and lower/ higher NPLs. In the Indonesia banking sector, we prefer BMRI IJ, BRIS IJ and BBCA IJ, all rated Buy.
Surging risk perception lowers BTPN’s valuation outlook
Though we raise our earnings forecasts for BTPN, we reduce our TP from IDR2,600 to IDR2,250 to reflect a combination of higher risk perception, increased cost of capital and declining loan growth in the current macroeconomic condition. The most significant factor contributing to this revision is the higher beta (raised from 1.5x to 2.0x), factoring in greater perceived volatility and risk, as we have witnessed on an YTD basis that the banking sector has been under pressure due to liquidity concerns (particularly funding costs). Other key parameters are a risk-free rate of 6.5%, an equity risk premium of 7.80%, and a CAR-adjusted ROAE of 13.0%.
These lead to a significant rise in cost of capital from 18.2% previously to 22.1%, which substantially reduces the present value of future earnings. Further, we believe that major banks will continue to dominate the sector (especially in terms of loans). With these in mind, we are discounting the stock at a higher rate due to increased risk factors and weaker long-term growth prospects.
Source: Company data, Verdhana estimates
