Indonesia Banks. Indonesia Industry Focus. Improving growth traction. DBS Group Research. Equity 17 Mar 2015 JCI : 5,426.47

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1 Indonesia Industry Focus Indonesia Banks Refer to important disclosures at the end of this report DBS Group Research. Equity 17 Mar 2015 Improving growth traction FY14 results largely in line for big banks Loan and earnings growth to pick up in 2015 Exchange rate fluctuations to have indirect impact BMRI remains our top pick 2014 was a tough year, as expected saw many of the smaller banks with weaker deposit franchises, such as BTPN, struggle to manage rising cost of funds and slower-than-expected growth. BBTN reported strong 4Q14 earnings, with sequential improvements in asset quality and loan growth. Earnings of the big four banks and conservative banks such as PNBN were largely in line, with most banks showing slight weakness in asset quality and increase in cost of funds. Growth to pick up in We expect loan growth to pick up this year to 15.6% (2014: 12.2%), driven mostly by the revival of mortgage loans. NIM will likely be flat and most banks indicated that liquidity remains tight due to persistent funding pressure from the government. The government has been aggressive in issuing bonds and securing funds to support planned infrastructure projects. Separately, we expect asset quality issues to moderate. We expect banks to deliver 15% earnings growth in Exchange rate fluctuations to have indirect impact. As the Indonesian Rupiah continues to weaken, there will be minimal direct impact on the banks. On average, US$ loans make up c.10% of total loans for the banks under our coverage. Smaller banks such as BTPN and BBTN are not exposed to US$ loans at all. We believe the big banks will be able to weather the currency pressures and keep asset quality in check. The impact will more likely be indirect, through the operations of borrower that are exposed to the US$ and the high foreign ownership in banking stocks. BBCA has the highest foreign shareholding. BMRI remains our top pick. We believe the big banks will stay resilient and withstand the currency pressures, and should have a stronger deposit franchise to compete for funding with the government. BMRI (BUY, TP Rp13,200) remain our top pick, premised on accelerated mortgage loan growth and the recovery of its Syariah unit. We downgrade PNBN to HOLD as valuation is rich; the share price has surged 18% since our upgrade on 2 Feb. JCI : 5, Analyst LIM Sue Lin suelinlim@dbs.com Christopher Daniel Wijaya Christopher@id.dbsvickers.com INDONESIAN BANKS COVERAGE Bank Central Asia 14,100 26,346 14, HOLD Bank Mandiri 11,900 21,043 13, BUY Bank Negara Indonesia 6,750 9,540 6, HOLD Bank Rakyat Indonesia 12,750 23,837 12, HOLD Bank Tabungan Negara 1, ,130 (2.1) (4.6) HOLD Bank Tabungan Pensiunan 4,230 1,872 4, (6.0) HOLD Panin Bank 1,210 2,209 1, HOLD Source: DBS Bank, DBS Vickers Indonesia banks: Summary of results Bank vs. DBS vs. Consensus Reasons for earnings variation Earnings revision/comments BBCA In line In line - Raised FY15-16F earnings by 3% on higher asset yields and fee income BMRI In line In line - Raised FY15-16F earnings by 2-3% on higher loan yields from higher retail loan mix BBNI In line In line - Raised FY15-16F earnings by 2% on lower provisions and higher loan growth and yields BBRI In line Slightly above BBTN Above Slightly below - Raised FY15F by 2% on higher loan yields, reduced FY16F by 2% for higher provisions NPL improved, loan growth picked up in 4Q BTPN Below Below High cost of funds, weak loan growth Raised FY15-16F earnings by c.15% on lower funding costs, higher NIM and lower provisions Cut FY15-16 earnings by 6% on higher funding costs which we underestimated previously PNBN In line In line - Cut FY15-16 earnings by 5-7% on lower loan growth and higher time deposit composition Source: DBS Bank, DBS Vickers Indonesia banks: Earnings and earnings growth trends 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, % 11.5% 15.1% 17.0% 16.4% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Growth (%) Source: DBS Bank, DBS Vickers, Companies Target Performance Price Mkt Cap Price (%) Rp US$m Rp 3 mth 12 mth Rating 20% 15% 10% 5% 0% ed-sgc / sa- MA

2 Industry Focus Indonesia Banks Highlights Loan and deposit growth to pickup. On average, loans will grow by 15.6% driven mainly by the recovery of mortgages. The wholesale and retail segments will also pick up, in along with the improving economy. Deposits will grow by 15.1% despite the government also competing for funding. We believe big banks with strong deposit franchises will have no problem in growing deposits. Loan-to-deposit ratio should remain at c.85% level. Indonesia banks: Loans and loan growth trends 1,000, , , , , % 12.2% 15.6% 16.5% 16.5% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Growth (%) Source: Companies, DBS Bank, DBS Vickers Indonesia banks: Deposits and deposit growth trends 1,200,000 1,000, , , , , % 13.6% 15.1% 15.5% 15.9% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Growth (%) Source: Companies, DBS Bank, DBS Vickers 25% 20% 15% 10% 5% 0% 16.5% 16.0% 15.5% 15.0% 14.5% 14.0% 13.5% 13.0% 12.5% 12.0% Indonesia banks: Loan-to-deposit trends 140% 120% 100% 80% 60% 40% 20% 0% 79.5% 85.3% 84.3% 84.6% 85.3% 85.8% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Source: Companies, DBS Bank, DBS Vickers Slight drop in NIM. On average, NIM will stay relatively flat at 6.8%. However, there may be a slight downside risk to NIM as banks which NIM had risen last year, such as BBCA, indicated that their current levels are too high and would normalise down. The reduction in cost of funds following the deposit rate cap and drop in BI rate will largely be offset by the reduction in lending rates, especially for mortgages and the retail segment. Furthermore, our economist believes BI will stick to their tight policy bias, and expect BI to keep the policy rate at 7.5% throughout the year due to currency pressure. Earnings growth is expected to pick up to 15% in 2015 following stronger loan growth. Indonesia banks: NIM trends 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 6.77% 6.93% 6.81% 6.75% 6.82% 6.89% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average 87% 86% 85% 84% 83% 82% 81% 80% 79% 78% 77% 76% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% Source: Companies, DBS Bank, DBS Vickers Page 2

3 Industry Focus Indonesia Banks Indonesia banks: Earnings and earnings growth trends 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, % 11.5% 15.1% 17.0% 16.4% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Growth (%) Source: Companies, DBS Bank, DBS Vickers Project slight deterioration in asset quality. BBRI has indicated that their NPL ratio would rise to % (from 1.7% currently) with the culprits being medium and small commercial enterprise loans. The weakening currency might also be a threat to businesses which revenues are in US$ and which could also be exposed to asset quality risks. Smaller banks such as BTPN and BBTN do not have any foreign exchange exposure, and we believe the big banks that do have the capacity to manage asset quality. Hence, the impact on NPL ratio will be minimal. 20% 15% 10% 5% 0% Other financial metrics intact. We expect fee-based income growth to remain at 15% driven by various transaction banking initiatives by the banks, including wider scope and coverage of mobile and internet banking. Cost-to-income ratio will be relatively flat with a moderate pace of branch expansion. Capital is still strong at Indonesian banks, far above the minimum requirement of 8%, with the bulk of capital still Tier-1. Indonesia banks: Non-interest income trends 30,000 25,000 20,000 15,000 10,000 5, % 15.5% 14.7% 16.8% 16.9% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Growth (%) Source: Companies, DBS Bank, DBS Vickers Indonesia banks: Cost-to-income ratio trends 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Indonesia banks: NPL ratio trends 4.5% 4.0% 3.5% 1.84% 3.0% 1.67% 1.67% 1.74% 1.79% 2.5% 2.0% 1.5% 1.72% 3.00% 2.50% 2.00% 1.50% 1.00% 70% 60% 50% 40% 30% 20% 10% 47.6% 46.0% 46.8% 47.0% 46.9% 46.9% 48.0% 47.5% 47.0% 46.5% 46.0% 45.5% 1.0% 0.5% 0.50% 0% F 2016F 2017F 45.0% 0.0% F 2016F 2017F 0.00% BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Source: Companies, DBS Bank, DBS Vickers Source: Companies, DBS Bank, DBS Vickers Page 3

4 Industry Focus Indonesia Banks Indonesia banks: Capital trends 25.0% 18.0% 17.9% 17.9% 17.8% 20.0% 17.4% 15.0% 16.6% 10.0% 5.0% 0.0% F 2016F 2017F BMRI BBRI BBCA BBNI BTPN BBTN PNBN Average Source: Companies, DBS Bank, DBS Vickers 18.5% 18.0% 17.5% 17.0% 16.5% 16.0% 15.5% Indonesia banks: USD loans to total loans 16% 14% 12% 10% 8% 15% 6% 4% 13% 11% 7% 7% 2% 0% 0% 0% BMRI BBRI BBCA BBNI BTPN BBTN PNBN Source: Companies, DBS Bank, DBS Vickers Indirect impact of exchange rate fluctuations. The direct impact on banks will be minimal. On average, only c.10% of the total loans of Indonesian banks under our coverage are in US$. The bigger banks with foreign exchange exposure will have the capability to manage potential asset quality issues in their US$ loan book. The impact on banks within our coverage will be mainly indirect, from debtors that are exposed to the US$. Free-float foreign ownership of the banks within our coverage is also relatively high and a risk would be investors exiting the Indonesian market due to a volatile currency. BBCA has the highest foreign ownership to total shares at 44%. Indonesia banks: Foreign ownership to total shares excluding strategic shareholders 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 33% 37% 44% 30% 27% 18% BMRI BBRI BBCA BBNI BTPN BBTN PNBN 4% Source: KSEI, DBS Bank, DBS Vickers, Page 4

5 Industry Focus Indonesia Banks Valuation Hovering at mean levels. Indonesian banks valuations have been close to mean levels for a while now, supported by the big banks. BBCA still leads the pack with a premium valuation. BMRI remains the cheapest large bank proxy to Indonesia s banking sector, and is our top pick. The big banks will stay resilient and withstand currency pressures, and should have a stronger deposit franchise to compete for funding with the government. Top pick: BMRI. We reiterate BMRI as our top pick premised on accelerated mortgage growth and the recovery of its Indonesia banks: Rolling forward PBV band x SD, SD, 2.28 Mean, SD, SD, 1.11 Syariah unit. Growth in retail loans will lift margins. The key risk to our call is persistent high NPLs in BSM. Downgrade PNBN to HOLD. We cut our loan growth assumption to 12% (previously 15%) amid a more conservative outlook. We raised growth assumption for time deposits, but cut CASA growth to keep CASA ratio at low 50% levels, which lifted cost of funds. This prompted us to lower FY15-16F earnings by 5-7% which led to a corresponding revision of our TP to Rp1,060 (from Rp1,230). No change to ratings and earnings for other banks. Indonesia banks: Rolling forward PBV band x Sector Average Non-big 4 average Big 4 average + 2SD, SD, 2.28 Mean, SD, SD, 1.11 Source: Companies, Bloomberg Finance L.P., DBS Bank, DBS Vickers Source: Companies, Bloomberg Finance L.P., DBS Bank, DBS Vickers Indonesian Banks: Peer comparison Banking Group Market cap Price Target Price Rating PE (x) CAGR PBV (x) ROE (%) Net div (%) (US$bn) (Rp/s) (Rp/s) FY14A FY15F FY16F ^ (%) FY14A FY15F FY16F FY15F FY15F Bank Central Asia 26,346 14,100 14,100 Hold 21.1x 17.9x 15.4x x 3.8x 3.2x 22.9% 1.4% Bank Mandiri 21,043 11,900 13,200 Buy 14.0x 11.8x 9.7x x 2.4x 2.0x 21.5% 2.5% Bank Negara Indonesia 9,540 6,750 6,400 Hold 11.7x 10.5x 9.3x x 1.9x 1.6x 18.9% 2.6% Bank Rakyat Indonesia 23,837 12,750 12,600 Hold 13.0x 11.6x 10.1x x 2.6x 2.1x 24.8% 1.7% Bank Tabungan Negara 909 1,135 1,130 Hold 10.5x 8.4x 6.8x x 0.9x 0.8x 11.0% 2.8% Bank Tabungan Pensiunan Nasional 1,872 4,230 4,400 Hold 12.8x 11.3x 9.6x x 1.7x 1.5x 16.5% 0.0% Panin Bank 2,209 1,210 1,060 Hold 12.4x 10.3x 9.5x x 1.2x 1.1x 12.7% 0.0% Weighted average 15.6x 13.4x 11.4x x 2.7x 2.3x 21.7% 1.9% Simple average 14.1x 11.7x 10.0x x 2.0x 1.7x 17.4% 1.7% Weighted average (ex BBCA) 13.3x 11.4x 9.7x x 2.2x 1.9x 21.1% 2.1% Simple average (ex BBCA) 13.1x 10.9x 9.3x x 1.7x 1.5x 16.6% 1.7% ^ Refers to 2-year EPS CAGR for FY14-16F Source: Companies, Bloomberg Finance L.P., DBS Bank, DBS Vickers Page 5

6 Industry Focus Indonesia Banks Stock Profiles Page 15

7 Focus Bank Central Asia Bloomberg: BBCA IJ Reuters: BBCA.JK Refer to important disclosures at the end of this repor DBS Group Research. Equity 17 Mar 2015 HOLD Rp14,100 JCI : 5, Price Target : 12-Month Rp 14,100 Potential Catalyst: Sustained earnings and balance sheet quality DBSV vs Consensus: Above consensus earnings Analyst LIM Sue Lin suelinlim@dbs.com Christopher Daniel Wijaya Christopher@id.dbsvickers.com Price Relative 15, , , , ,895.0 Rp Relative Index 5, M ar-11 M ar-12 M ar-13 M ar-14 M ar-15 B a n k C e n tra l A sia (L H S ) Relative JCI INDEX (RHS) Forecasts and Valuation FY Dec (Rp bn) 2013A 2014A 2015F 2016F Pre-prov. Profit 19,094 22,744 24,724 28,678 Net Profit 14,256 16,512 19,415 22,511 Net Pft (Pre Ex.) 14,256 16,512 19,415 22,511 EPS (Rp) EPS Pre Ex. (Rp) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (Rp) PE Pre Ex. (X) Net DPS (Rp) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (Rp) 2,589 3,149 3,718 4,394 P/Book Value (x) Growth to pick up Corporate loans and mortgages to drive growth CASA ratio and asset quality will be maintained Maintain HOLD; Rp14,100 TP Growth driven by mortgages and corporate loans. Management expects loans to grow by 12-15% driven by corporate loan and a revival in mortgages. BBCA is currently offering a promotional rate of 8.88% fixed for the first two years for mortgages, to boost demand. BBCA believes that mortgages are safer loans as they target middle- and high income segment, where average ticket size is over Rp1bn and the collateral is high quality. Maintain CASA ratio and asset quality. There will be strong competition for funding from the government due to aggressive growth targets for infrastructure spending. Nevertheless, BBCA is convinced that CASA will be the main growth driver for funding thanks to its strong deposit franchise. Deposits should continue to be driven by CASA while time deposits will only be fillers if they require further funding. Loan-to-deposit ratio will be at the safe 75-80% range. Management does not expect any asset quality pressure this year. Maintain HOLD; TP at Rp14,100. Our TP is based on the Gordon Growth Model with the following assumptions: 23.7% ROE, 14.4% cost of equity and 11% growth. BBCA has proven to be resilient throughout the economic cycle, and deserves premium valuation for Its excellent asset quality and deposit franchise. But the stock is a HOLD because valuation is stretched, in our view. We would advocate buying on weakness. Earnings Rev (%): 0 0 Consensus EPS (Rp): Other Broker Recs: B: 9 S: 5 H: 20 ICB Industry : Financials ICB Sector: Banks Principal Business: Bank Central Asia (BBCA) is Indonesia's premium transactional bank given its legacy with the Salim group pre-asian crisis. BBCA has successfully leveraged on ithis strength to deliver sustainable earnings growth. Source of all data: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P. At A Glance Issued Capital (m shrs) 24,655 Mkt. Cap (Rpbn/US$m) 347,636 / 26,346 Major Shareholders Farindo Invest Ltd (%) 51.2 Free Float (%) 48.8 Avg. Daily Vol.( 000) 11,891 Page 7 ed: SGC / sa: MA

8 Company Focus Bank Central Asia INVESTMENT THESIS Profile Bank Central Asia (BBCA) is Indonesia's premium transactional bank given its legacy with the Salim group pre- Asian crisis. BBCA has successfully leveraged on this strength to deliver sustainable earnings growth. Rationale Still delivering strong earnings growth Loan growth will inch up to 13-15% in NIM should also improve slightly to 6.7% as the company is expected to reprice loans amid relatively strong loan demand. Asset quality remains strong and NPL will remain low at 0.5%. Valuation We have a HOLD recommendation on BBCA with a Rp14,100 target price derived from the Gordon Growth Model. BBCA is trading at a large premium to peers because of its solid balance sheet and liquidity position. Risks Losing its trademark as a transaction bank BBCA has been garnering significant amounts of low cost deposits because of its transaction banking franchise over the year. If it does lose this edge, funding costs will escalate and NIM will be significantly pressured. Source: DBS Bank, DBS Vickers Page 8

9 Company Focus Bank Central Asia Income Statement (Rp bn) Balance Sheet (Rp bn) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Net Interest Income 26,425 32,027 36,092 41,825 Cash/Bank Balance 63,484 71,305 85, ,598 Non-Interest Income 7,301 9,024 9,536 11,181 Government Securities 75,922 55,235 61,940 69,769 Operating Income 33,726 41,051 45,628 53,006 Inter Bank Assets 3,770 3,264 3,427 3,598 Operating Expenses (14,631) (18,306) (20,904) (24,327) Total Net Loans & Advs. 306, , , ,528 Pre-provision Profit 19,094 22,744 24,724 28,678 Investment 14,754 44,772 49,727 55,178 Provisions (2,016) (2,240) (601) (709) Associates Associates Fixed Assets 7,440 8,845 8,319 7,776 Exceptionals Goodwill Pre-tax Profit 17,816 20,741 24,389 28,277 Other Assets 24,254 27,032 30,443 34,304 Taxation (3,559) (4,229) (4,973) (5,766) Total Assets 496, , , ,751 Minority Interests Customer Deposits 409, , , ,354 Preference Dividend Inter Bank Deposits 3,301 3,754 3,528 3,641 Net Profit 14,256 16,512 19,415 22,511 Debts/Borrowings 3,634 5,585 5,989 6,426 Net Profit bef Except 14,256 16,512 19,415 22,511 Others 15,917 16,962 16,439 16,701 Minorities Shareholders' Funds 63,866 77,683 91, ,391 Total Liab& S/H s Funds 496, , , ,751 Profitability & Efficiency Ratios (%) Financial Stability Measures (%) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Margins, Costs & Efficiency Balance Sheet Structure Yld. On Earnings Assets Loan-to-Deposit Ratio Avg Cost Of Funds Net Loans / Total Assets Spread Investment / Total Assets Net Interest Margin Cust. Dep./Int. Bear. Liab Cost-to-Income Ratio Interbank Dep / Int. Bear Employees ( Year End) Asset Quality Effective Tax Rate NPL / Total Gross Loans Business Mix NPL / Total Assets Net Int. Inc / Opg Inc Loan Loss Reserve Coverage Non-Int. Inc / Opg inc Provision Charge-Off Rate Fee Inc / Opg Income Capital Strength Oth Non-Int Inc/Opg Inc Total CAR Profitability Tier-1 CAR ROAE Pre Ex Growth ROAE Total Net Loans ROA Pre Ex Customer Deposits ROA Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2014 2Q2014 3Q2014 4Q2014 Net Interest Income 7,629 7,798 8,153 8,469 Non-Interest Income 2,120 2,096 3,574 4,208 Operating Income 9,749 9,894 11,727 12,676 Operating Expenses (4,693) (4,387) (5,482) (3,779) Pre-Provision Profit 5,056 5,507 6,245 8,898 Provisions (342) (444) (721) (3,694) Associates Exceptionals Pretax Profit 4,629 5,289 5,473 5,351 Taxation (958) (1,098) (1,122) (1,051) Minority Interests (7) (4) (7) (9) Net Profit 3,664 4,187 4,343 4,291 Source: Company, DBS Bank, DBS Vickers Page 9

10 Focus Bank Mandiri Bloomberg: BMRI IJ Reuters: BMRI.JK Refer to important disclosures at the end of this repor DBS Group Research. Equity 17 Mar 2015 BUY Rp11,900 JCI : 5, Price Target : 12-Month Rp 13,200 (previous Rp13,000) Potential Catalyst: Retail loan growth and recovery in mortgages and Syariah; resolution of Syariah operations DBSV vs Consensus: Top pick on BMRI Analyst LIM Sue Lin suelinlim@dbs.com Christopher Daniel Wijaya Christopher@id.dbsvickers.com Price Relative Rp Relative Index , , , , , , , , , M ar-11 M ar-12 M ar-13 M ar-14 M ar-15 Bank M andiri (LHS) R elative JC I IN D EX (R H S) vid Forecasts and Valuation FY Dec (Rp bn) 2013A 2014A 2015F 2016F Pre-prov. Profit 28,408 31,507 37,039 44,308 Net Profit 18,204 19,872 23,436 28,773 Net Pft (Pre Ex.) 18,204 19,872 23,436 28,773 EPS (Rp) ,004 1,233 EPS Pre Ex. (Rp) ,004 1,233 EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (Rp) ,004 1,233 PE Pre Ex. (X) Net DPS (Rp) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (Rp) 3,747 4,400 5,038 6,020 P/Book Value (x) Earnings Rev (%): 0 0 Consensus EPS (Rp): 961 1,097 Other Broker Recs: B: 22 S: 3 H: 9 ICB Industry : Financials ICB Sector: Banks Principal Business: Bank Mandiri (BMRI) is Indonesia's largest bank by assets. Currently 60% owned by the Government of Indonesia, BMRI has a strong corporate loan base and it is currently expanding to the retail sector. Source of all data: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P. Back in action Growth to pick up this year Currently in third phase of 5-year plan Dividend payout ratio reduced to 25% Maintain BUY; TP raised to Rp13,200 Growth to pick up this year. Management indicated that loans will grow by 15-17% this year, driven by a pick-up in mortgages after flat growth last year. Bank Syariah Mandiri (BSM) will also see growth as NPLs improve this year, which would also boost loan growth. NPL ratio is expected to be c.2%, but the bank remains conservative with credit charge off rate, targeting %. NIM will exceed 5.8% as the group continues to shift to higher-yielding loans and lower cost of funds. Third phase of 5-year plan. In this phase, the bank will focus on deepening relationships with wholesale clients to be a market leader in transaction banking, continue to expand retail loans and deposits, integration among subsidiaries, and maximise crossselling potential. Reduced dividend payout. BMRI concluded its AGM today and has declared Rp212 DPS, implying 25% payout of last year s earnings (previous year 30%). Additionally, there were changes in management - three directors on the board were replaced by four new directors. Three of the new members are from BMRI and one is external but previously with BMRI. Maintain BUY; TP raised to Rp13,200. We imputed the change in dividend payout ratio and subsequently raised our TP. Our TP is derived from the Gordon Growth Model which assumes 22.4% ROE, 10.9% growth and 15.3% cost of equity implying FY15F 2.6x PBV. Growth in retail loans will lift margins. Key risk to our call is persistent high levels of NPLs at BSM. At A Glance Issued Capital (m shrs) 23,333 Mkt. Cap (Rpbn/US$m) 277,667 / 20,934 Major Shareholders Govt. of Indonesia (%) 60.0 Free Float (%) 40.0 Avg. Daily Vol.( 000) 21,423 Page 10 ed: SGC/ sa: MA

11 Company Focus Bank Mandiri INVESTMENT THESIS Profile Bank Mandiri (BMRI) is Indonesia's largest bank by assets. Currently 60% owned by the Government of Indonesia, BMRI went through a transformation process that started in 2003, and has successfully positioned itself into what it is today. Rationale Margin improvements ahead Growth will remain at 15-18% in 2015, but margins will improve with the switch from corporate loans to higher yielding retail loans. Expect syariah and consumer loans to recover next year. CASA is also expected to grow at a faster pace next year. Turnaround at Syariah unit Bank Mandiri Syariah is expected to turn around in 2015 and NPLs are expected to taper off. Better risk management initiatives and a new top management as well as director of retail risk will improve operations in its Syariah Unit. Boost in fee-based income Fee based income will be driven by the cross-selling of existing insurance, loan and deposit products. BMRI will also tap up and down the value chain of existing customers in order to create a transaction banking ecosystem. Valuation We have a BUY recommendation for BMRI with Rp13,200 TP. Our TP is derived from the Gordon Growth Model which assumes 22.6% ROE, 10.9% growth and 15.3% cost of equity. BMRI remains our top pick in the Indonesian banking universe. Risks Asset quality risk Loan growth has been driven by corporates, where yields are competitive. NPLs for syariah banking has experienced stress over the past few quarters.bmri continues to grow higher yielding retail business loans aggressively to support NIM, but this comes with higher risk. Change in dividend payout If the government requests higher dividend payout, growth might be hampered. Source: DBS Bank, DBS Vickers Page 11

12 Company Focus Bank Mandiri Income Statement (Rp bn) Balance Sheet (Rp bn) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Net Interest Income 35,403 41,813 45,426 53,642 Cash/Bank Balance 95, , , ,121 Non-Interest Income 14,467 14,834 19,919 23,216 Government Securities 85, , , ,199 Operating Income 49,870 56,647 65,345 76,859 Inter Bank Assets 26,318 18,381 22,095 26,514 Operating Expenses (21,462) (25,140) (28,306) (32,551) Total Net Loans & Advs. 450, , , ,640 Pre-provision Profit 28,408 31,507 37,039 44,308 Investment 26,807 40,521 46,103 52,797 Provisions (4,856) (5,529) (6,637) (7,118) Associates Associates Fixed Assets 7,646 8,929 8,929 8,929 Exceptionals Goodwill Pre-tax Profit 24,062 26,008 30,434 37,228 Other Assets 39,940 52,892 47,802 50,313 Taxation (5,232) (5,353) (6,138) (7,508) Total Assets 733, , ,991 1,109,512 Minority Interests (626) (783) (861) (947) Customer Deposits 556, , , ,076 Preference Dividend Inter Bank Deposits 12,672 17,532 15,102 16,317 Net Profit 18,204 19,872 23,436 28,773 Debts/Borrowings 22,242 29,934 26,739 22,817 Net Profit bef Except 18,204 19,872 23,436 28,773 Others 53,054 66,105 59,579 62,842 Minorities 1,371 2,187 3,048 3,995 Shareholders' Funds 87, , , ,465 Total Liab& S/H s Funds 733, , ,991 1,109,512 Profitability & Efficiency Ratios (%) Financial Stability Measures (%) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Margins, Costs & Efficiency Balance Sheet Structure Yld. On Earnings Assets Loan-to-Deposit Ratio Avg Cost Of Funds Net Loans / Total Assets Spread Investment / Total Assets Net Interest Margin Cust. Dep./Int. Bear. Liab Cost-to-Income Ratio Interbank Dep / Int. Bear Employees ( Year End) Asset Quality Effective Tax Rate NPL / Total Gross Loans Business Mix NPL / Total Assets Net Int. Inc / Opg Inc Loan Loss Reserve Coverage Non-Int. Inc / Opg inc Provision Charge-Off Rate Fee Inc / Opg Income Capital Strength Oth Non-Int Inc/Opg Inc Total CAR Profitability Tier-1 CAR ROAE Pre Ex Growth ROAE Total Net Loans ROA Pre Ex Customer Deposits ROA Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2014 2Q2014 3Q2014 4Q2014 Net Interest Income 8,980 9,123 9,375 11,654 Non-Interest Income 4,111 4,421 4,344 4,874 Operating Income 13,091 13,544 13,719 16,528 Operating Expenses (5,411) (5,831) (6,391) (7,741) Pre-Provision Profit 7,680 7,713 7,328 8,787 Provisions (1,217) (1,624) (909) (1,779) Associates Exceptionals Pretax Profit 6,459 6,098 6,434 7,018 Taxation (1,336) (1,636) (1,566) (1,599) Minority Interests (198) Net Profit 4,925 4,660 4,868 5,419 Source: Company, DBS Bank, DBS Vickers Page 12

13 Focus Bank Negara Indonesia Bloomberg: BBNI IJ Reuters: BBNI.JK Refer to important disclosures at the end of this repor DBS Group Research. Equity 17 Mar 2015 HOLD Rp6,750 JCI : 5, Price Target : 12-Month Rp 6,400 Potential Catalyst: Higher fee-based income, ample liquidity for growth DBSV vs Consensus: Slightly above consensus Analyst Christopher Daniel Wijaya Christopher@id.dbsvickers.com LIM Sue Lin suelinlim@dbs.com Price Relative Rp Relative Index 7, , , , , , , , , , Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Bank Negara Indonesia (LHS) Relative JCI INDEX (RHS) Forecasts and Valuation FY Dec (Rp bn) 2013A 2014A 2015F 2016F Pre-prov. Profit 11,789 15,132 16,066 18,135 Net Profit 9,054 10,783 11,984 13,598 Net Pft (Pre Ex.) 9,054 10,783 11,984 13,598 EPS (Rp) EPS Pre Ex. (Rp) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (Rp) PE Pre Ex. (X) Net DPS (Rp) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (Rp) 2,552 3,168 3,637 4,173 P/Book Value (x) Earnings Rev (%): 2 2 Consensus EPS (Rp): Other Broker Recs: B: 20 S: 2 H: 9 ICB Industry : Financials ICB Sector: Banks Principal Business: Bank Negara Indonesia (BBNI) is a state-owned bank that conducts commercial and consumer banking services. BBNI ranks fourth in the Indonesian banking sector based on assets, lending and third party deposits. Source of all data: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P. New board at the helm Generally cautious this year New Board of Directors to be appointed in March Nudged up FY15-16F earnings Maintain HOLD; Rp6,400 TP Generally cautious. BBNI is targeting 14-16% loan growth driven by business banking. Deposits are expected to grow by 13-16% and CASA ratio will be maintained at 65-67%. LDR will be 86-88% with gross NPL ratio at %. Coverage ratio will be high at 130% (FY14: 128%) in anticipation of headwinds. New Board of Directors from March. Some of the current directors terms have ended, including current President Director Gatot M Suwondo, Vice-President Director Felia Salim and Finance Director Yap Tjay Soen. A new Board will be appointed at the EGM on 17 March. We do not expect the overall strategy of the bank to change, but there is a risk it could happen. Nudged up FY15-16F earnings by 2%. We reduced NPL assumption to 2% (previously 2.2%) on the back of the improving collection and screening processes. As a result, we also reduced provisions. We also bumped up loan growth and yields. We now earnings to grow by 11% in Maintain HOLD; Rp6,400 TP. Our TP is based on the Gordon Growth Model with the following assumptions: 18.7% ROE, 10% growth and 15.0% cost of equity, and implies 1.8x FY15F BV. Improvements in fee-based income arising from the insurance tie-up could lift earnings further. BBNI also has ample liquidity for growth. At A Glance Issued Capital (m shrs) 18,649 Mkt. Cap (Rpbn/US$m) 125,878 / 9,490 Major Shareholders Republic of Indonesia (%) 60.0 Free Float (%) 40.0 Avg. Daily Vol.( 000) 23,370 Page 13 ed: SGC / sa: MA

14 Company Focus Bank Negara Indonesia INVESTMENT THESIS Profile Bank Negara Indonesia (BBNI) is a state-owned bank that conducts commercial and consumer banking services. BBNI ranks fourth in the Indonesian banking sector based on assets, lending and third-party deposits. BBNI offers integrated financial services to its customers, supported by its subsidiaries: Bank BNI Syariah, BNI Multi Finance, BNI Securities and BNI Life Insurance. Rationale Balancing growth and liquidity For 2015, BBNI is targeting 14-16% loan growthdriven by business banking and 13-16% deposit growth. CASA-tototal deposits will be sustainable at 65-67%, and loan-todeposit ratio will be 86-88% with gross NPL ratio at %%. Cost-to-income ratio should remain stable but there will be capex for office buildings and branches in Korea and Myanmar. Valuation We have a HOLD recommendation on BBNI with a target price of Rp6,400. Improvements in fee-based income arising from the insurance tie-up could provide upside to earnings. Risks New board of directors after March 2015 The current Board s term has ended after seven years. The outgoing directors include current President Director Gatot M Suwondo, Vice- President Director Felia Salim and Finance Director Yap Tjay Soen. A new Board will be appointed at the EGM on 17 Mar. We do not expect the overall strategy of the bank to change, but there is a risk it could happen. Source: DBS Bank, DBS Vickers Page 14

15 Company Focus Bank Negara Indonesia Income Statement (Rp bn) Balance Sheet (Rp bn) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Net Interest Income 19,058 22,376 23,482 26,033 Cash/Bank Balance 37,321 40,528 48,373 56,036 Non-Interest Income 7,303 8,859 9,895 11,711 Government Securities 43,329 50,067 50,348 50,710 Operating Income 26,361 31,235 33,377 37,743 Inter Bank Assets 23,473 14,527 15,254 16,017 Operating Expenses (14,573) (16,103) (17,311) (19,609) Total Net Loans & Advs. 243, , , ,751 Pre-provision Profit 11,789 15,132 16,066 18,135 Investment 12,005 12,776 13,959 15,282 Provisions (570) (1,786) (1,203) (1,261) Associates Associates Fixed Assets 5,514 6,222 6,668 7,073 Exceptionals Goodwill Pre-tax Profit 11,278 13,524 15,050 17,081 Other Assets 21,256 21,801 22,791 24,494 Taxation (2,220) (2,695) (3,010) (3,416) Total Assets 386, , , ,365 Minority Interests (4) (47) (56) (67) Customer Deposits 291, , , ,745 Preference Dividend Inter Bank Deposits 3,185 3,177 3,181 3,179 Net Profit 9,054 10,783 11,984 13,598 Debts/Borrowings 24,987 17,370 16,699 16,303 Net Profit bef Except 9,054 10,783 11,984 13,598 Others 18,909 21,112 19,690 20,242 Minorities 83 1,950 2,006 2,073 Shareholders' Funds 47,600 59,072 67,821 77,823 Total Liab& S/H s Funds 386, , , ,365 Profitability & Efficiency Ratios (%) Financial Stability Measures (%) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Margins, Costs & Efficiency Balance Sheet Structure Yld. On Earnings Assets Loan-to-Deposit Ratio Avg Cost Of Funds Net Loans / Total Assets Spread Investment / Total Assets Net Interest Margin Cust. Dep./Int. Bear. Liab Cost-to-Income Ratio Interbank Dep / Int. Bear Employees ( Year End) 17,000 17,000 17,000 17,000 Asset Quality Effective Tax Rate NPL / Total Gross Loans Business Mix NPL / Total Assets Net Int. Inc / Opg Inc Loan Loss Reserve Coverage Non-Int. Inc / Opg inc Provision Charge-Off Rate Fee Inc / Opg Income Capital Strength Oth Non-Int Inc/Opg Inc Total CAR Profitability Tier-1 CAR ROAE Pre Ex Growth ROAE Total Net Loans ROA Pre Ex Customer Deposits ROA Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2014 2Q2014 3Q2014 4Q2014 Net Interest Income 5,290 5,464 5,640 5,982 Non-Interest Income 2,368 2,435 2,487 3,425 Operating Income 7,658 7,899 8,127 9,407 Operating Expenses (3,447) (3,847) (3,903) (4,906) Pre-Provision Profit 4,211 4,052 4,224 4,501 Provisions (1,233) (971) (1,104) (334) Associates Exceptionals Pretax Profit 3,012 3,196 3,384 3,932 Taxation (618) (653) (710) (760) Minority Interests Net Profit 2,394 2,543 2,674 3,172 Source: Company, DBS Bank, DBS Vickers Page 15

16 Focus Bank Rakyat Indonesia Bloomberg: BBRI IJ Reuters: BBRI.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 17 Mar 2015 HOLD Rp12,750 JCI : 5, Price Target : 12-Month Rp 12,600 Potential Catalyst: Continued growth of higher-yielding micro segment, branchless banking and satellite initiatives DBSV vs Consensus: In line with consensus but with a HOLD recommendation, while most of the market is calling a BUY Analyst LIM Sue Lin suelinlim@dbs.com Christopher Daniel Wijaya Christopher@id.dbsvickers.com Price Relative Rp Relative Index 13, , , , , , , , , , Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Bank Rakyat Indonesia (LHS) Relative JCI INDEX (RHS) Forecasts and Valuation FY Dec (Rp bn) 2013A 2014A 2015F 2016F Pre-prov. Profit 30,074 34,081 39,287 44,228 Net Profit 21,344 24,237 27,156 31,167 Net Pft (Pre Ex.) 21,344 24,237 27,156 31,167 EPS (Rp) ,101 1,263 EPS Pre Ex. (Rp) ,101 1,263 EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (Rp) ,101 1,263 PE Pre Ex. (X) Net DPS (Rp) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (Rp) 3,209 3,955 4,940 5,983 P/Book Value (x) Earnings Rev (%): 2 (2) Consensus EPS (Rp): 1,083 1,242 Other Broker Recs: B: 28 S: 2 H: 7 ICB Industry : Financials ICB Sector: Banks Principal Business: Bank Rakyat Indonesia (BBRI), specialises in small scale and microfinance lending mainly to retail clients largely in the rural areas. It also has a comparatively small, but growing, corporate business. It is currently 59% government owned. Source of all data: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P. Moderate growth Moderate growth, still driven by micro loans KUPEDES Rakyat to replace Micro KUR Raised FY15F earnings marginally on higher loan yields Maintain HOLD; Rp12,600 TP Moderate growth expected. BBRI is targeting 15-17% loan growth (we expect it to be closer to 15%) driven by micro loans which are expected to grow by 18%. Loanto-deposit ratio is expected to be at 80-92%; the ratio tends to be higher in the first three quarters and improve in 4Q. NPL ratio will increase to % (FY14: 1.7%). Earnings growth will be 10-12%. KUPEDES Rakyat to replace Micro KUR. The government is still finalising the new scheme for Micro KUR. BBRI indicated that they will continue to offer KUPEDES Rakyat in its place. KUPEDES Rakyat generates higher yields and offers higher maximum ticket size than Micro KUR. Raised FY15 earnings by 2%; trimmed FY16F earnings by 2%. We increased our loan yield assumption for FY15F as we had underestimated that previously. The larger share of micro loans will also boost yields. We also increased NPL assumption to 2.1% (previously 1.6%), which led to higher provisions. FY16F earnings are marginally tweaked lower due to higher provisions. Maintain HOLD; Rp12,600 TP. Our TP is based on the Gordon Growth Model and assumes 23.3% ROE, 10% growth and 15.5% cost of equity implying 2.6x FY15F BV. Although liquidity position has improved, high levels of special mention loans still prevail. BBRI s special mention loans to total loans is higher than peers at 6.3% in At A Glance Issued Capital (m shrs) 24,669 Mkt. Cap (Rpbn/US$m) 314,532 / 23,837 Major Shareholders Govt of Indonesia (%) 59.0 Free Float (%) 41.0 Avg. Daily Vol.( 000) 26,927 Page 16 ed: SGC / sa: MA

17 Company Focus Bank Rakyat Indonesia INVESTMENT THESIS Profile BBRI is Indonesia's leading micro lender, mainly to retail clients largely in the rural areas. It also has a comparatively small but growing corporate business. It is currently a 60% government-owned operating company. Rationale Micro lending to remain resilient Stable growth going into Management has guided for 15-17% loan growth for 2015 with micro loans continuing to be the growth driver, especially with the new government being pro mass market. Valuation BBRI is currently rated HOLD with a TP of Rp12,600. Although its liquidity position has improved, high levels of special mention loans may deteriorate NPL levels in an uncertain macroeconomic environment. Risks Slow down in micro lending BBRI faced a significant slowdown in micro lending activities in 2011, which hurt net interest margin (NIM). A repeat of that could again hurt BBRI s NIM and growth trends. Asset quality issues BBRI has exposure to more sensitive small and medium commercial loans. BBRI also has the highest level of special mentioned loans amongst the big banks. Source: DBS Bank, DBS Vickers Page 17

18 Company Focus Bank Rakyat Indonesia Income Statement (Rp bn) Balance Sheet (Rp bn) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Net Interest Income 44,106 51,442 60,875 70,095 Cash/Bank Balance 93, , , ,447 Non-Interest Income 8,348 9,299 10,019 11,522 Government Securities 18,951 43,307 45,688 48,209 Operating Income 52,455 60,742 70,894 81,617 Inter Bank Assets 12,596 11,461 12,607 13,868 Operating Expenses (22,381) (26,660) (31,607) (37,389) Total Net Loans & Advs. 432, , , ,480 Pre-provision Profit 30,074 34,081 39,287 44,228 Investment 42,897 84,420 98, ,952 Provisions (3,946) (5,724) (6,992) (6,793) Associates Associates Fixed Assets 3,973 5,917 7,679 9,246 Exceptionals Goodwill Pre-tax Profit 27,910 30,854 34,570 39,677 Other Assets 21,803 27,507 25,795 26,968 Taxation (6,556) (6,605) (7,401) (8,494) Total Assets 626, , ,514 1,034,170 Minority Interests (10) (12) (14) (16) Customer Deposits 504, , , ,021 Preference Dividend Inter Bank Deposits 3,691 8,655 6,173 7,414 Net Profit 21,344 24,237 27,156 31,167 Debts/Borrowings 17,205 33,322 25,826 20,579 Net Profit bef Except 21,344 24,237 27,156 31,167 Others 21,678 39,918 30,798 35,358 Minorities Shareholders' Funds 79,164 97, , ,592 Total Liab& S/H s Funds 626, , ,514 1,034,170 Profitability & Efficiency Ratios (%) Financial Stability Measures (%) FY Dec 2013A 2014A 2015F 2016F FY Dec 2013A 2014A 2015F 2016F Margins, Costs & Efficiency Balance Sheet Structure Yld. On Earnings Assets Loan-to-Deposit Ratio Avg Cost Of Funds Net Loans / Total Assets Spread Investment / Total Assets Net Interest Margin Cust. Dep./Int. Bear. Liab Cost-to-Income Ratio Interbank Dep / Int. Bear Employees ( Year End) Asset Quality Effective Tax Rate NPL / Total Gross Loans Business Mix NPL / Total Assets Net Int. Inc / Opg Inc Loan Loss Reserve Coverage Non-Int. Inc / Opg inc Provision Charge-Off Rate Fee Inc / Opg Income Capital Strength Oth Non-Int Inc/Opg Inc Total CAR Profitability Tier-1 CAR ROAE Pre Ex Growth ROAE Total Net Loans ROA Pre Ex Customer Deposits ROA Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2014 2Q2014 3Q2014 4Q2014 Net Interest Income 12,401 12,007 13,517 13,517 Non-Interest Income 1,825 2,020 2,870 2,584 Operating Income 14,226 14,027 16,387 16,102 Operating Expenses (6,321) (5,146) (7,965) (7,228) Pre-Provision Profit 7,905 8,881 8,422 8,873 Provisions (1,100) (1,994) (1,846) (779) Associates Exceptionals Pretax Profit 7,411 7,390 7,754 8,304 Taxation (1,474) (1,602) (1,314) (2,214) Minority Interests Net Profit 5,937 5,788 6,440 6,090 Source: Company, DBS Bank, DBS Vickers Page 18

19 Focus Bank Tabungan Negara Bloomberg: BBTN IJ Reuters: BBTN.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 17 Mar 2015 HOLD Rp1,135 JCI : 5, Price Target : 12-Month Rp 1,130 Potential Catalyst: Improving NPLs, government policies spur growth in housing loans DBSV vs Consensus: Slightly below consensus Analyst Christopher Daniel Wijaya Christopher@id.dbsvickers.com LIM Sue Lin suelinlim@dbs.com Price Relative Rp Relative Index 1, , , , M ar-11 M ar-12 M ar-13 M ar-14 M ar-15 Bank Tabungan Negara (LHS) R e lativ e JC I IN D E X (R H S) Forecasts and Valuation FY Dec (Rp bn) 2013A 2014A 2015F 2016F Pre-prov. Profit 2,568 2,318 2,620 3,029 Net Profit 1,562 1,116 1,400 1,727 Net Pft (Pre Ex.) 1,562 1,116 1,400 1,727 EPS (Rp) EPS Pre Ex. (Rp) EPS Gth (%) 15 (29) EPS Gth Pre Ex (%) 15 (29) Diluted EPS (Rp) PE Pre Ex. (X) Net DPS (Rp) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (Rp) 1,116 1,179 1,282 1,408 P/Book Value (x) Earnings Rev (%): Consensus EPS (Rp): Other Broker Recs: B: 11 S: 0 H: 9 ICB Industry : Financials ICB Sector: Financial Services Principal Business: Banking Source of all data: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P. Optimistic improvements Government s initiative to boost mortgage growth Expect improvement in asset quality and growth Maintain HOLD; Rp1,130 TP Government s initiative to boost mortgages. The government targets to build one million houses this year. Of this, 460k will be financed by the FLPP scheme and 400k by non-subsidised mortgage loans; the rest will be fully-subsidised by the government. BBTN will be involved in financing both the non-subsidised and subsidised mortgage segments (in 2014, BBTN had 95% market share of subsidised mortgage loans). The management indicated that any reduction in the FLPP rate would not impact margins as the government funding portion would be adjusted accordingly. Current FLPP rate is 7.25% and the government is funding 25% of the total amount. Improving asset quality and growth. The management expects loans to grow by 17-19% and deposits by 19-20% this year. NPL ratio is expected to drop below 3% and NIM will likely revert back to % as funding cost pressures ease. Coverage ratio should increase slightly. Management believes that the new government housing scheme will boost growth, while improvements in its screening and collection processes will reduce NPLs. Maintain HOLD; Rp1,130 TP. Our TP is based on the Gordon Growth Model with the following assumptions: 14% ROE, 8.6% growth and 14.7% cost of equity. Concerns over asset quality and earnings prospects had been an overhang and capped the share price. But with these largely addressed, the key risk for the bank now would be unforeseen regulatory changes that could hurt earnings, including an unfavorable FLPP funding rate and excessive pressure to reduce lending rates. At A Glance Issued Capital (m shrs) 10,568 Mkt. Cap (Rpbn/US$m) 11,994 / 909 Major Shareholders Government of Indonesia (%) 60.1 Free Float (%) 39.9 Avg. Daily Vol.( 000) 58,111 Page 19 ed: SGC / sa: MA

20 Company Focus Bank Tabungan Negara INVESTMENT THESIS Profile Bank Tabungan Negara (BBTN) provides commercial banking services. 80% of its loan book is related to property loans. BBTN specialises in subsidised mortgage loans and has the largest market share in this segment. Rationale Government initiative to support growth BBTN will be involved in financing the mjaority of the 460k houses that wil be offered under the subsidised mortgage scheme, and a portion of the 400k houses to be offered for non-subsidised mortgage. NIM and NPL improvements Margin improvements will be evident along with lower cost of funds,driven by improving liquidity conditions in the market. Management has guided for NPL to drop further as a result of the improved collection and screening process. Valuation We have a HOLD recommendation with a Rp1,130 TP. Concerns over asset quality and earnings prospects had been an overhang and capped the share price. The sustainable improvements in asset quality and growth of housing loans due to the new government policy could be the next rerating catalyst. Risks Tightening liquidity The difficulty in striking a balance between raising customer deposits and maintaining low cost of funds pressured BBTN s deposit growth in FY14. Liquidity may be tight if deposit growth continues to lag loan growth. NIM pressure With its asset-liability structure skewed towards fixed rate loans and higher cost TDs, high cost of funds and failure to pass on higher deposit costs to customers could pressure NIM. Capital risk In order to keep LDR at above 100%, BBTN needs to maintain a miminum CAR of 14%. There is not much buffer between this and BBTN s current CAR level. Source: DBS Bank, DBS Vickers Page 20