Bank Rakyat Indonesia BBRI IJ -Buy- A contrarian call

A contrarian call

On a YTD basis, BBRI’s share price has underperformed its peers (BMRI / BBCA / BBNI / BRIS – all Buys) considerably by ~11-82%. Indeed, on a YTD basis, BBRI share price has declined by ~4% (compared to +~8-78% performance from these peers, and the JCI’s gains of 6.4%). This underperformance primarily reflects investors’ concerns over BBRI’s mass market loan portfolio (in 2H23, it showed some weakness), in our view. Consequently, the bank recorded not only slowed micro growth but also increased credit costs (due to worsened loan quality, which led to a rise in write-off particularly for its micro/mass-market loan portfolios). While we still think BBRI is not yet out of the woods with respect to asset quality for its mass market portfolio, we see limited downside risks to its earnings and thus share price. For these reasons, we reiterate our Buy rating on the stock.

In this note, we look at several key factors/indicators and conclude that BBRI deserves a re-rating. These include:

1. Resilient core results. Core bank-only performance (on a YTD Jul-24 basis) shows similar results with its peers particularly with respect to y-y growth in net interest income as well as PPOP. Granted its headline profit growth of 2% y-y is weaker than its peers YTD Jul-24, largely due to rising credit costs (declining credit costs for its peers), we argue that BBRI’s core results show that its other loan portfolios have remained relatively healthy. We also argue that much of the bank’s micro loan write-offs are related to “legacy” loans and should not impact future core earnings. Moreover, the bank has stepped up its prudent approach, as seen in its recent slowed micro loan growth. Our analysis also suggests that BBRI’s core earnings for its micro portfolio continue to show resilient results (refer to Fig 2 which shows the bank’s rising PPOP trend for the micro portfolio).

2. Loan write-offs have peaked. BBRI’s write-off was on a rising trend from 1Q22, and it peaked out only in 1Q24. Although still elevated, BBRI’s write-offs have moderated and at the same time it has maintained high credit costs (CoC). If we compare the bank’s CoC with ts 12MMA write-offs, we believe BBRI considerably built up its loan buffer in 2021-2022. This explains why among its peers BBRI has the highest LLR (and it remains well above its pre-pandemic levels). In our view, the moderating write-off trend should translate into lower credit costs in the medium term, providing room for the bank to grow its headline profit.

3. Limited consensus earnings risks. Since 1Q24, we have seen consensus earnings downgrades. However, we think current earnings projections of ~IDR60tr for FY24F suggest limited downside earnings risks. On the contrary, we think we could see positive surprises (i.e., moderating credit costs going into 2025F). Limited foreign direct investment (FDI) outflow. Our fund flow analysis suggests that foreign ownership in BBRI has declined from the peak of ~19% in 1Q24 to ~15% currently – implying FDI outflow of ~USD895mn on a YTD basis. However, in recent weeks, we saw some foreign inflows back into the stock. And in our opinion, with potentially more positive catalysts than negative drivers, BBRI’s risk-reward profile has improved.

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.