In this note, we take a closer look at the asset quality trends of major Indonesia banks and BRIS (Bank Syariah Indonesia). Specifically, we look at their monthly loan write-off trends, one of the leading indicators of bank asset quality. We also compare the banks’ estimated write-offs with their credit costs. Typically, high write-off rates would suggest that the bank needs elevated credit costs unless it takes loan-loss provision releases. These are reflected in the banks’ LLR decline as seen in recent results. Going into 2025, we think lower credit costs (CoC) are less likely to materialize. And hence banks would need to rely more on loan growth and/or NIM stability to drive their earnings.

Based on our assessment, we regard BBCA as the most conservative. Not only has the bank seen a slight downtrend in write-off rates, but it has also maintained stable CoC, resulting in stable LLR. Similarly, BBRI has seen persistently elevated write-offs (primarily reflecting the micro/mass-market loan clean-ups), but the bank has also kept elevated CoC. As such, BBRI has not done much provision releases, which ultimately has resulted in its elevated LLR, the highest among major banks.

We have also seen a generally improving write-off trend for BMRI, from ~1.8% in Dec-23 to ~1.0% in Nov-24. This may explain the bank’s lower CoC, though in recent months CoC has stabilized at ~0.6%. This suggests that BMRI has not made provision releases in recent months, resulting in a stable LLR of ~3.0%. This should minimize future earnings risks for the bank, in our view.

On the flip side, we note, the write-off trend for BBNI has been on an upward trend, reaching ~2.2% in Nov-24 (from ~1.9% in Dec-23). Meanwhile, its CoC has declined from ~1.4% in 2023 to ~1.1% in YTD Nov-24. This has resulted in its LLR declining to ~5.4% in Nov-24 from ~6.8% in Dec-23. The upward write-off trend at BBNI is a concern to us given that its peers have seen more favorable trends.

We also take a closer look at BRIS – the largest syariah bank in Indonesia. Like its major peers (BBCA/BMRI), the bank has seen a downward write-off trend, from ~0.9% in Dec-23 to ~0.6% in Oct-24. This has resulted in lower CoC of ~0.9% in Oct-24 from ~1.2% in Dec-23 – implying an LLR of ~4.0% in Oct-24 (from ~4.1% in Dec-23).

Given the above, BBCA, followed by BMRI remain our preferred Indonesia banking stocks. In the syariah banking space, we continue to have BRIS as our top pick.

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 IDR8,700 using DuPont methodology, with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 1.03x, and a CAR-adjusted ROAE of 20.0%. We also use 2025F book as reference. Our TP implies 2.5x FY25F P/B and 12.6x FY25F P/E – compared with the current valuation of 2.1x FY25F P/B and 10.1x FY25F P/E. Risks are worse-than-expected macroeconomic trends, government intervention, tight liquidity competition, and higher credit cost (due to worsening asset qualities) and higher opex growth.

BBRI – 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 (compared to current multiples of 1.8x and 9.8x, 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. 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.

BBNI – We derive our 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%. We also use 2025F book as reference. 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 – Our TP of IDR3,800 is based on 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%. We have also used 2025F book value to derive our TP. Our TP implies an FY25F P/B of 3.3x and an FY25F P/E of 22.0x (compared to current multiples of of 2.7x and17.8x, respectively). 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.

Fig. 1: Bank-only annualised write-offs, Dec-19-Oct-24 %

Fig. 2: Bank-only annualised CoC, Dec-19-Oct-24 %

Fig. 3: Bank-only LLR, Dec-19-Oct-24 %

Fig. 4: Annualised NPL formation (b4 WO) % of loans

Fig. 5: Annualised LAR formation (b4 WO) % of loans

Fig. 6: ROAE (%) over 1Q18-4Q23

Fig. 7: ROAA (%) over 1Q18-4Q23

Fig. 8: Major banks – key ratios

Fig. 9: ROAE and ROAA trends of major banks

Fig. 10: BBCA – improving risk-adj NIM and ROAE trends

Fig. 11: BMRI – improving risk-adj NIM and ROAE trends

Fig. 12: BBRI – improving risk-adj NIM and ROAE trends

Fig. 13: BBNI – improving risk-adj NIM and ROAE trends

Fig. 14: Local weighting of big 4 banks since January 2021

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.

This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.

RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Nicholas Santoso (nicholas.santoso@verdhana.id) 

Erwin Wijaya (erwin.wijaya@verdhana.id)