Bank Rakyat Indonesia: Expecting Slower Growth – Comprehensive Analysis

Broker Name: Maybank Sekuritas Indonesia

Date: November 5, 2024

Introduction

Bank Rakyat Indonesia (BBRI) is facing a period of slower growth. This comprehensive analysis delves into the bank’s financial performance, focusing on earnings, loan growth, and future projections. Despite the challenges, BBRI remains a compelling investment, with a strong focus on corporate loans and a solid dividend yield.

Financial Performance Overview

BBRI’s 9M24 earnings amounted to IDR45.1 trillion, marking a modest 2.5% year-on-year increase. This performance achieved 70% and 74% of our and consensus full-year forecasts, respectively. Higher pre-provision operating profit (PPOP) of 10.5% year-on-year drove earnings, although this was offset by a significant provision expense increase of 28.2% year-on-year. The earnings missed our estimates due to a lower-than-expected net interest margin (NIM) of 7.7%, down 22 basis points quarter-on-quarter and 42 basis points year-on-year.

Shifting Loan Focus

BBRI’s lending growth lagged at 8.2% year-on-year, compared to the industry’s 10.8% year-on-year growth. The bank shifted its lending focus towards corporate loans, which grew by 16.9% year-on-year, and medium segment loans, which saw a 24.6% increase year-on-year. Consumer loans also grew by 10.0% year-on-year, while micro and small segments experienced lower growth at 6.4% and 1.1% year-on-year, respectively. This strategic shift aims to manage asset quality but at the cost of lower yields.

Non-Interest Income Boost

One of the main drivers of BBRI’s earnings growth was stronger non-interest income, which increased by 29.8% year-on-year for 9M24. Notable contributors included recovery income, which surged by 63.4% year-on-year, fees and commissions up by 10.3% year-on-year, and gains from the sale of securities, up by 9.7% year-on-year. The bank’s significant write-off of IDR33.5 trillion in 9M24, a 30% increase year-on-year, is expected to further boost recovery income.

Share Price and Dividend Yield

BBRI’s share price stands at IDR 4,720, with a 12-month price target of IDR 5,400, representing a 19% potential upside. The bank offers a net dividend yield of 6%, making it an attractive investment despite the challenges. The market capitalization of BBRI is IDR715.4 trillion, with the Government of Indonesia holding a 53.2% stake.

Valuation and Financial Metrics

BBRI’s valuation is starting to look attractive, trading at just 2.0x FY25E P/BV, below its 10-year P/BV mean. Even with lower earnings expectations, the bank is expected to maintain a 70% dividend payout over the next three years, supported by a high capital adequacy ratio (CAR) of 25% as of September 2024. This would offer a dividend yield of 5.5%/5.8%/6.4% for FY24-26E at the current share price.

Key Highlights

• Prioritizing quality lending to corporates: Loan growth moderated to 8.2% year-on-year, with a focus on corporate and medium segment loans to manage asset quality.
• Slower time deposit growth: Deposits grew by 5.6% year-on-year, driven by the current account. This led to a marginal CASA improvement by 39 basis points year-on-year to 64.2% in September 2024.
• Stronger PPOP growth: PPOP grew by 10.5% year-on-year, supported by recovery income, which increased by 65% year-on-year. Significant write-offs in 9M24 are expected to continue supporting non-interest income growth.
• Credit costs: Credit costs are likely to stay at 3.0%, with persistently high NPL levels of 2.9% and NPL coverage dropping to 215% from 229% in FY23.

ESG Initiatives

BBRI received an “A” rating in the MSCI ESG Rating and a score of 63 in the S&P Global corporate sustainability assessment. The bank issued the first Sustainability Bond in Indonesia in March 2019, valued at USD500 million, with a 3.95% coupon and a five-year tenor. This bond funds projects with social and environmental impacts.

Environmental, Social, and Governance (ESG) Efforts

BBRI has implemented green lending initiatives, requiring debtors in the palm oil industry to be registered or certified by Roundtable Sustainable Palm Oil or Indonesia Sustainable Palm Oil. As of FY22, corporate green financing reached 7.7% of its total loan portfolio, or IDR78.8 trillion. The bank’s emission reduction activities include distributing tree seedlings and planting trees in various regions.

Governance Structure

The Government of Indonesia owns 53.19% of BBRI’s series B shares and one series A share, granting it privileges such as approving amendments to the Articles of Association, changes to equity, and the appointment and dismissal of board members. The shareholders’ meeting is BBRI’s highest decision-making body, with the Board of Directors responsible for daily operations and the Board of Commissioners supervising and monitoring activities.

Social Impact

In 2022, BBRI employed 69 disabled individuals and had 34,364 female employees, representing 42% of the total workforce. The bank disbursed IDR251.5 trillion in subsidized micro loans (KUR) to over 10.9 million borrowers across Indonesia. BBRI’s CSR budget realization in FY22 was IDR285 billion, supporting various activities, including school renovations, disaster relief, and medical equipment donations.

Quantitative and Qualitative ESG Parameters

BBRI’s quantitative parameters show a commitment to reducing emissions and promoting sustainability. The bank’s target to achieve 90% financial inclusion by 2024 is progressing well, with 84% achieved. The goal of having 25% female leadership by 2023 is close, with 23% achieved. BBRI aims for net zero carbon by 2060.

Conclusion

Despite the anticipated slower growth, BBRI remains a viable investment with its strategic shift towards corporate loans, robust non-interest income, and attractive valuation. The bank’s commitment to ESG initiatives further enhances its appeal. Investors should consider BBRI’s potential for steady dividend payouts and long-term growth prospects.