Bank Rakyat Indonesia BBRI IJ / BBRI.JK

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1 Vol (mn) Equity Research Bank Rakyat Indonesia BBRI IJ / BBRI.JK BUY (Upgrade from: HOLD) Results Update BCAS Vignette Banking Sector A consistently pattern of growth Facts: Solid net profit growth in 1H17, on higher NII BBRI booked net profits of IDR6.8tn (+14.9% YoY; +1.9% QoQ) in 2Q17. This translates to 1H17 of IDR13.4tn (+1.4% YoY) in-line with our (49%) and consensus (48%) estimates. The encouraging expansion of earnings in 2Q17 was mainly driven by moderate NII, 7.4% YoY higher in 2Q17, which suggests slight NIM improvement to 8.1% in 2Q17 (vs. 8.% in 1Q17) and stable compare to 2Q16 NIM of 8.1% reported in 2Q16. Going forward, BBRI expects potential NIM pressure on more intense competition in high-yielding assets (Payroll-loans) from other banks. BBRI recorded solid loan growth of 11.8% YoY as of end of Jun-17. The key loan growth drivers at the end of Jun-17 were micro (+11.4% YoY), consumer (+13.4% YoY) and small commercial (+21.7% YoY) segments, which were allowed to squeeze out corporate portion (including SOE), which fell to 25.6% at the end of Jun-17, from 27.9% at the end of Mar-17 and 27.6% a year earlier. This is in-line with management s expectation to reset their focus on micro business, reducing their exposure to corporate segment to below 2% of total loans in the long term. NPL ratio still persistently stuck at % in Jun-17. NPL ratio ticked up, to 4% in Jun-17 from 6% in Mar-17, although slightly lower than the 9% recorded in Jun-16. Note that SOE segment, which had previously never contributed any NPL, recorded.55% in Jun-17. This emerged from Meratus Jaya Wijaya Iron and Steel, which has been experiencing trouble with mismatched technology and raw material processing. Additionally, SML ratio hit almost 1% at the end of Jun-17, a casualty of cement players with outstanding loans amounting to IDR3.5tn. Outlook: earnings should continue solid; bad loans fully covered Going forward, we believe BBRI is likely to deliver 217 and 218 earnings growth of 1.5% and 12.8% YoY respectively, which should be helped by manageable personnel and lower provisioning charge next year. Additionally, we believe BBRI will keep its prudent strategy in its balance sheet, NPL is expected to improved gradually while the NPL coverage ratio has reached 19%. Meanwhile, loan growth would be mainly driven by high yield micro financing. Note that micro loan accounted for 34.3% of bank s loans at end June 217 vis-à-vis 33.1% at end March this year. Recommendation: Upgrade to BUY with TP of IDR17,1 We upgrade our rating to BUY, as we roll over our valuation to 218F, with implied PBV of, providing higher TP of IDR 17,1 (previously IDR 16,1) with 15.2% potential upside. Downside risks: increased operating expenses and lower-than-expected loan growth. Exhibit 1. Financial Summary Year-end 31 Dec (IDR bn) Net interest income 58,279 67,574 75,113 81,397 87,648 Pre-prov. op. profit 39,43 47,663 54,93 55,985 59,98 Net profit 25,398 26,196 28,936 32,64 36,685 BCAS/Consensus n.a. n.a EPS (IDR) 1,3 1,62 1,173 1,323 1,487 EPS growth P/E (x) BVPS (IDR) 4,574 5,935 6,684 7,538 8,495 P/B (x) DPS (IDR) Yield ROE estimate, *Closing price as of 3 August August 217 Willy Suwanto willy.suwanto@bcasekuritas.co.id ext 178 Gilang Purnama gilang.purnama@bcasekuritas.co.id ext 178 Current Price: IDR14,85 Target Price: IDR17,1 (IDR16,1 previously) Upside potential: 15.2% 12M PRICE PERFORMANCE (IDR) 16, , 1. 12, - 1, (1.) BBRI IJ (LHS) Rel. to JCI performance (RHS) Aug-16 Feb-17 Aug-17 STOCK PERFORMANCE YTD 1M 3M 12M Absolute 27.2% -4.2% 1% 27.5% JCI Return 9.1% -% 2.4% 8.% Relative 18.1% -% 1.1% 19.5% MARKET DATA 12M price range (IDR) : 1,475-15,5 12M PE range (x) : Outstanding shares (mn) : 24,669 Market cap (IDRbn)/(USDmn) : 366,337 / 27,488 Avg daily turn. (IDRbn/USDmn) : / 17.4 SHAREHOLDERS Government of Indonesia : 56.8% Public (each below 5%) : 43.3%

2 Exhibit 2. Financial Summary Income Statement Year-end 31 Dec (IDRbn) Interest income 85,435 94,787 14, , ,231 Interest expense (27,156) (27,214) (29,459) (32,918) (33,584) Net interest income 58,279 67,574 75,113 81,397 87,648 Non-interest income 12,49 17,11 18,485 18,392 2,96 Total operating income 7,688 84,585 93,598 99,789 17,743 Operating expenses (31,285) (36,922) (38,668) (43,84) (47,835) Pre-prov. op. profit 39,43 47,663 54,93 55,985 59,98 Provisions expense (8,891) (13,7) (18,268) (14,631) (13,429) Operating profit 3,511 33,963 36,662 41,354 46,479 Non-op. inc./(exp.) 1, Pre-tax profit 32,494 33,974 36,673 41,365 46,49 Corporate tax (7,83) (7,746) (7,71) (8,687) (9,763) Minorities (13) (32) (35) (39) (43) Net profit 25,398 26,196 28,936 32,64 36,685 EPS (IDR) 1,3 1,63 1,173 1,323 1,487 Balance Sheet Year-end 31 Dec (IDRbn) Placement with other banks 2,911 15,91 13,91 12,23 1,814 Loans 58,753 66,741 74, ,26 949,58 Government bonds 3,816 3,318 2,885 2,58 2,181 Other int-earning assets 213,28 218, , , ,29 Financial assets impairment (17,162) (22,184) (32,36) (35,937) (39,866) Net earning assets 81, , ,536 1,78,191 1,195,478 Cash 28,772 25,212 28,111 31,344 34,949 Fixed assets 8,39 24,515 26,967 32,36 42,68 Other assets 4,27 77,385 78,134 81,831 85,713 Total assets 878,426 1,3,644 1,14,749 1,223,727 1,358,27 Customer deposits 668, , , ,46 1,45,921 Deposits from other banks 12,126 2,74 2,877 3,21 3,172 Borrowing and sub-debts 47,422 43,76 44,198 44,64 46,872 Other liabilities 36,756 55,86 51,48 51,559 52,74 Total liabilities 765, , ,419 1,37,265 1,148,39 Minorities Equity 112, , , ,944 29,573 Total liabilities and equity 878,426 1,3,644 1,14,749 1,223,727 1,358,27 BVPS (IDR) 4,574 5,935 6,684 7,538 8,495 Breakdown Year-end 31 Dec As % of earning assets Gross loan Government bonds Other earnings assets As % of loan book Corporate Commercial & SME Consumer Micro Syariah & others As % of deposit Core deposit Time deposit Ratios & assumptions Year-end 31 Dec NIM Loan-to-deposit ratio Cost-to-income ratio Credit cost Gross NPL NPL coverage Total CAR Tier-1 CAR ROA ROE Average asset yield Average funding cost Average loan yield Average deposit cost Loan growth Deposit growth EPS growth estimate We expect net profit to reach IDR28.9tn (+1% YoY) in 217F due to lower-thanexpected operating expenses growth. Total 217F loans should touch IDR74tn (+12% YoY) BBRI has been focusing on micro loans as opposed to corporate loans. Gross NPL is likely to stabilize around % 2

3 Exhibit 3. Results Summary QoQ YoY YoY 6M17/ 6M17/ (IDRbn) 2Q16 1Q17 2Q17 6M16 6M17 217F cons Interest Income 23,997 24,655 26, ,749 5, Interest expense 6,857 6,746 7, ,46 14,39 (.7) Net interest income 17,14 17,99 18, ,343 36, Non-interest income 8,752 4,9 5, (38.4) 8,752 9, Total operating income 41,95 21,999 23, (4) 41,95 45, Operating expense 18,11 8,787 1, (44.4) 18,11 18,8 4.4 Impairment of fin. assets 7,559 5,243 5, (25.6) 7,559 1, Operating profit 15,525 7,97 8, (47.2) 15,525 16, Pretax profit 7,838 8,114 8, ,578 16, Net profit 5,931 6,646 6, ,182 13, BS & ratios analysis 2Q16 1Q17 2Q17 6M16 6M17 Gross loans (IDRbn) 584, , ,32 584, ,32 Third party funding (IDRbn) 683, , , , ,114 Key ratios Net interest margin Cost efficiency Cost to income Loan/deposit Loan/funding Capital adequacy Gross NPL LLP/NPL ROAE estimate Exhibit 4. NPL vs. CoC BBRI has always been successful in maintaining NPL, while focusing on micro loans Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 CoC NPL 3

4 Exhibit 5. Loan breakdown (IDRtn) % 4% 21% % 4% 21% 13% 13% 13% 13% 3% 3% 3% 2% 2% 2% Micro loans will dominate the loan mix, while corporate loans will get smaller. 1 31% 32% 33% 33% 34% Q17 2Q17 Micro Consumer Small Commercial Medium Corporate Non-SoE SoE Exhibit 6. Micro loan breakdown (IDRtn) % 24% 7% 3% 8% 2% 2% % 25% 1% KUR slowly adds its portion in micro loans % 81% 74% 74% 74% Q17 2Q17 Kupedes Kupedes Rakyat Micro KUR New Micro KUR Exhibit 7. BBRI s net profit (IDRbn) 4, , , 25, 2, 15, 1, 5, ,242 25, , ,936 32, , F net profit is expected to increase after lower-thanexpected opex Net profit Growth 4

5 Teguh Hartanto Director of Equity, ext: 129 RESEARCH DIVISION Pandu Anugrah Jennifer Frederika Yapply Arga Samudro Head Of Research, ext: 168 Senior Manager, ext: 179 FI Analyst, ext: 181 Strategy, Automotive, Heavy Equipment Cigarettes, Consumer, Health Care, Media FI Strategies & Macroeconomist Aditya Eka Prakasa Johanes Prasetia Michael Ramba Equity Analyst, ext: 182 Equity Analyst, ext: 185 Equity Analyst, ext: 184 Telco, Coal, Metal Mining Retail, Poultry Construction, Property Residential Nyoman Widita Prabawa Gilang Purnama Willy Suwanto Equity Analyst, ext: 18 Equity Analyst, ext: 178 Equity Analyst, ext: 178 Cement, Plantation, Oil & Gas Banking, Industrial Estate Banking, Consumer Prasetya Gunadi Achmad Yaki Yamani Equity Analyst, ext: 183 Technical Analyst, ext: 186 Banking Technical Analyst Yuni Pratiwi Anindra Alief Mattawang Research Assistant, ext: 183 Research Assistant, ext: 186 EQUITY CAPITAL MARKET DIVISION Ermawati Agustina Erman Head of Institutional Sales, ext: 159 Haslienda Santoso Jodikin Arief Iskandar Equity Capital Market, ext: 137 Sales Trader, ext: 164 Institutional Dealer, ext: 136 DISCLAIMER By receiving this research report ("Report"), you confirm that: (i) you have previously requested PT BCA Sekuritas to deliver this Report to you and you are legally entitled to receive the Report in accordance with Indonesian prevailing laws and regulations, and (ii) you have fully read, understood and agreed to be bound by and comply with the terms of this Report as set out below. 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