Bank Victoria International, Tbk

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1 Equity Valuation Bank Victoria International, Tbk Secondary Report March 31, 2015 Target Price Low High Banking Stock Performance JCI 5,600 BVIC 135 5, ,200 5,000 4,800 4, Strong Commitment to Sustain Growth 4,400 4,200 JCI BVIC Source : Bloomberg, PEFINDO Research & Consulting - Stock Information Ticker code IDR BVIC Market price as of March 30, Market price 52 week high 132 Market price 52 week low 117 Market cap 52 week high (bn) 922 Market cap 52 week low (bn) 763 Stock Valuation Last Current High Low Market Value Added & Market Risk Market Risk 1,1 1 0,9 0,8 0,7 0,6 0,5 0,4 0,3 Sep-12 Sep-13 Sep-14 Market Value Added Market risk Source : Bloomberg, PEFINDO Research & Consulting - Shareholders* (%) PT Victoria Investama Tbk Suzanna Tanojo Atrium Asia Investment Management Pte.Ltd 8.19 PT Suryayudha Investindo Cipta 5.87 PT Nata Patindo 3.08 Public (each below 5% of ownerships) * As of February 2015 Contact: Phone: (6221) info-equityindexvaluation@pefindo-consutling.co.id page is an integral part of this MVA PT Bank Victoria International Tbk (BVIC) traces its history to 1992 when it was established as a private commercial bank. It was approved by the Ministry of Finance of the Republic Of Indonesia to operate as a commercial bank in In 1997, BVIC obtained a permit from Bank Indonesia to become a Foreign Exchange Trader. BVIC listed its stocks on the stock exchanges in Jakarta and Surabaya in 1999, and in May 2014 the stocks was shift from Development Board to Main Board. Since the IPO, BVIC has been actively carrying out corporate actions, such as limited public offerings (rights issue) in 2000, 2003, 2006, 2008 and 2011; and bond issuance in 2000, 2007, 2012, and In 2007, BVIC acquired 99.98% of PT Bank Swaguna, which it converted to PT Bank Victoria Syariah in As of September 2014, BVIC had a head office, 5 main branch offices, 63 sub-branch offices, and 32 cash offices, strategically located in greater Jakarta area and Surabaya. In October 16, 2014, BVIC has opened its latest main branch located in Bandung. Page 1 of 11

2 INVESTMENT PARAMETERS Board of Directors Eko R. Gindo (President Director) Anthony Soewandy (Deputy CEO) Gregorius Andrew A. Haswin (Treasury, FI & Capital Market Director) Ramon Marlon Runtu (Business Director) Oliver Simorangkir (Operation and System Director) Tamunan (Compliance and Risk Management Director) Target Price Adjustment We made several adjustments to our previous projections, and adjust our target price to a range of IDR376 IDR432 per share, based on the following considerations: Solid industry. Despite the slowing down of credit growth, we are of the view that the Indonesia banking industry is relatively solid. Although the loan distribution and fund acquisition only grew by 12% Ytd and 11% Ytd, respectively, but we view that in 2015 the growth of this industry will be back to normal (above 15% YoY), on the back of Indonesia s economic growth of 5.4% - 5.8%. Capital Adequacy ratio for banking industry was still higher than the minimum threshold. As of November 2014, the Capital Adequacy Ratio (CAR) was still 19.6%, higher than minimum of 8%. Enlarging coverage, enriching products. We are of the view that BVIC is currently in the process of tightening the relationship with the customers, by setting up more branches as well as products. Its branches grew from 4 branches at the end of 2013 to 6 branches by the end of 2014, and expected to be 10 branches in Along with that, BVIC enrich its products by launching a bundling program of deposits and bancassurance that provide not only attractive interest rate to the customers but also insurance protection, known as VIP Duo and VIP Super Duo. Beside that, BVIC also launched a saving product that also equipped with free insurance protection for the customers, known as VIP Safe. With such actions, we view that BVIC will reap the rewards by acquiring more third party funds since the earliest Strong commitment to sustain growth. PT Victoria Investama Tbk, majority but not controlling shareholders of BVIC, execute its rights from owning BVIC warrants VI series. With such action, BVIC earned IDR50.9 billion of proceeds, and push its paid-up capital to IDR713.9 billion. We view that such action is appropriate, since it kept BVIC s Capital Adequacy Ratio (CAR) at 18.11%, and avert BVIC from difficult condition amid growing interest rate environment. Change of Risk-free rate, equity premium, and beta assumption to 7.43%, 3.43%, and 0.84x respectively. Business Prospects With the increasing of Bank Indonesia s (BI) rate to 7.75% in December 2014, we estimate that the Indonesia banking industry in 2015 will only slightly better than in However, with the higher estimation of economic growth, which requires banks to finance such growth, we view that the Indonesian commercial banks will book a 16.4% of loan distribution growth in Particularly for BVIC, with the increasing number of branches and type of funding products, we view that BVIC will have a faster third party funding acquisition since the early of Along with expected economy growth, we believe that BVIC s revenue will grow by 23.3% in 2015, and 20.4% CAGR during periods. Table 1: Performance Summary P 2015P Interest income (IDR bn) 851 1,117 1,601 2,016 2,487 Interest expense (IDR bn) (679) (779) (1,124) (1,557) (1,846) Net profit (IDR bn) EPS (IDR) EPS Growth (%) (15) 59 P/E (x) * 2.4* PBV (x) * 0.3* Source: PT Bank Victoria International Tbk, PEFINDO Research & Consulting - Estimates Notes: *) Based on Share Price as of March 30, 2015 IDR119/share March 31, 2015 Page 2 of 11

3 MACROECONOMY AND INDUSTRY Expecting an Increase of Economic Growth in 2015 The growth of Indonesia s economy in 4Q2014 is expected to hover around 5%. Declining Government consumption as parts of its saving program, and also household consumption as an effect of increasing inflation caused this slow growth. With fewer subsidies given to the domestic fuel price as well as declining global price of fuel, we expect that both Government and household consumption will improve significantly since 1Q2015. However, export of domestic goods will not be improved significantly as a result of slower demand from China. Overall, in 2014 economic growth is expected to hit bottom range of %, but improved since 1Q2015 and expected to end at % in Strong appreciation of US Dollar caused by the continuation of US economy improvement, gave pressured on not only Rupiah but also all the currencies in the world. By the end of November 2014, Rupiah had been depreciated by average of 0.21% to the level of IDR12,167/USD, and lastly to IDR12,440/USD at the end of December However, in 2015, we expect that the Rupiah will appreciate to around IDR12,000/USD, as the Government now has much room to narrow the current account deficit. Low and manageable inflation until October 2014 was ended once the Government cut the subsidized fuel price in November From 4.83% of inflation as of October 2014, it went up to 6.23% in November In December with Christmas and New Year s eve and holiday, the inflation ended at 8.36%. However, we expect that the level of inflation will fall as the price of subsidized fuel will continue to drop and triggering low inflation of around 5.5% in Table 2: Indonesia Economic Indicators P* GDP Growth (%, YoY) Inflation rate (%, YoY) Exchange rate (Rp/USD) BI rate (%) , , , Source: Bank Indonesia, PEFINDO Research & Consulting - Notes: * PEFINDO Research & Consulting - Estimates , Slower Credit Distribution and Funding Acquisition in 2014, but Expected to Rebound in 2015 In 2014, we expect that the national commercial banks continue to experience a slow growth. Marked as election year and compounded with slow demand from overseas, causing export activities from Indonesian companies to soften. Such situation spill over to commercial banking industry, as proved by their loan distribution and third parties fund acquisition activities that were only grew by 12% Ytd, and 11% Ytd, respectively, during January November 2014 periods. And we estimate that such growth will continue until the end of Such decelerating growth was caused by slower growth of Working Capital Credit (11.4% YoY as of November 2014), which counted for 48% of national credit. In 2015, we view that the growth of credit from Indonesian commercial banks of 16.46% YoY is relevant. Our views is based on the fact that several incentives will be implemented in 2015 by the Indonesia Financial Services Authority, such as adjustment on the weight of risk for Government priority sectors, and create a linkage between banks and Perusahaan Penjaminan Kredit Daerah (PPKD) to stimulate the growth of credit in the regions by Indonesia Financial Services Authority. March 31, 2015 Page 3 of 11

4 Figure 1: Growth of credit distribution and third party funds from commercial banks, M M2014 Credit distribution of commercial banks (IDR, mio) Third party funds of commercial banks (IDR, mio) Source: Bank Indonesia, PEFINDO Research & Consulting - Equity & Index Valuation Division Revenue Kept Growing, But Bottom Line Grew Soft Amid growing environment of high interest rate and slowing down of credit disbursement, we view that the Indonesian commercial banks were still booking strong revenue growth. From IDR414.1 trillion of revenue in 11M2013, it grew to IDR516.2 trillion during 11M2014 (24.6% YoY). Such growth was followed with the growth of net interest income (37.3% YoY), due to the increasing interest rate of credit. However, decreasing other income creates a lower margin and growth operating profit in 11M2014. Figure 2: Indonesian Commercial Banks Income Statement Highlights, 11M2013 vs 11M2014 Source: Bank Indonesia, PEFINDO Research & Consulting - Equity & Index Valuation Division Credit Risk was Still in Control Until November 2014, the Indonesian banks Capital Adequacy Ratio (CAR) remains solid at 19.6%, far above the minimum requirement of 8%. It improves from 18.4% as of December 2013, reflecting strong resistance of Indonesian banks to face the increasing trend of interest rate. The Non-Performing Loan was also remain low at 2.00%. Table 3: Indonesian Commercial Banks Indicators Jan 14 Nov 14 Total assets (Rp, trillion) NPL gross (%) CAR (%) 4, , Source: Bank Indonesia, PEFINDO Research & Consulting - March 31, 2015 Page 4 of 11

5 BUSINESS Taste the Same Experience as the Industry During 9M2014 periods, we view that BVIC experienced the same situation as the industry. BVIC s loans and sharia financing only grew by IDR956.8 billion (8.46% YtD), while its deposits from customers and other banks only grew by IDR1, billion (6.72% YtD). Such growths were relatively smaller compare to the same period in 2013, when its loans and sharia financing and deposit from customers and other banks were growing by 32.21% YtD, and 17.90% YtD. Growing amount of loan to real estate supporting and third parties time deposits were the main factors that supporting such growth during 9M2014. However, we view that such condition will not be extended to 2015, as the Government will try to push the growth of economy to the range of % and will require banks to fund such growth. Figure 3: Loans and Deposits of BVIC, 2012 Sept 14 20, , , , , , , , , , % 17.90% 8.46% 32.21% 2012 Sep Sep-14 Loans and sharia financing - gross (IDR, bn) Deposits from customers and other banks (IDR, bn) Source: PT Bank Victoria International Tbk, PEFINDO Research & Consulting - Equity & Index Valuation Division Strong Commitment from the Shareholders Amid the growing interest rate environment and high uncertainty of business during 9M2014, BVIC s shareholders showed its commitment to the Company. It showed by the execution of warrants VI series by PT Victoria Investama Tbk, one of BVIC s shareholders. From the execution of warrants, BVIC earned IDR50.9 billion of proceeds by issuing million of new shares to PT Victoria Investama Tbk. With this action, BVIC s paid-up capital increased to IDR713.9 billion since June 2014 and remains until September 2014, higher than IDR663.0 billion as of December Figure 4: BVIC s Shareholder Composition, Dec 13 Vs Sept 14 March 31, 2015 Page 5 of 11

6 More Products for Customers To provide more investment product for customers, BVIC launch three new products in 2014, i.e. VIP Duo, VIP Super Duo, and Tabungan VIP Safe. The first two programs are enhancement of time deposit product, in which BVIC blended them with insurance from Generali Insurance and Jiwasraya Insurance. Meanwhile, Tabungan VIP Safe is a saving product that equipped with high return (up to 8% p.a) and insurance for the customers. With such customers oriented products, we estimate that BVIC will have no difficulties on acquiring new funds from third parties in the future. FINANCE Not Easy to Pass-Through the Increasing Cost of Funds During 9M2014 periods, we view that BVIC was still able to increase its amount of distributable loans amid the increasing rate environment. However, such growing amount of loans distribution was not as fast as the growing amount of its funding acquisition, particularly from time deposits. As a result, BVIC s interest and sharia income rose by 32.3% YoY as of September 2014, but its interest expenses and sharia grew by 55.0% YoY. Therefore, BVIC s net interest income and sharia was only hit IDR billion, below its 9M2013 period of IDR367.6 billion. It was also influenced by the decreasing interest rate of fixed loan, which had the biggest portion of loan during 9M2014, from 13.95% p.a. to 13.72% p.a. Meanwhile, BVIC s average time deposit interest rate picture a different trend, as it significantly went up from 7.72% p.a. as of December 2013 to 10.57% p.a. as of September Figure 5: BVIC s Interest Income, Interest Expenses and Net Interest Income, Sept 13 Vs Sept 14 Capital Adequacy Ratio Remain Strong We understand that it was not easy for the Indonesian banks to distribute loans under growing interest rate environment. Existing debtors also had a hard time to repay its debts amid the decreasing economic growth and growing interest rate environment. As a result, BVIC s Non-Performing Loan rose from IDR104.6 billion as of December 2013 to IDR339.5 billion as of September However, with strong commitment from its shareholders, as shown by the increasing paid-up capital, BVIC s consolidated CAR ratio remain safe at 18.11%, far above Bank Indonesia s minimum requirement of 8%. March 31, 2015 Page 6 of 11

7 Figure 6: BVIC s NPL and CAR Ratio, Dec 13 Vs Sept % % 18.40% 18.30% % % 18.10% 18.00% 0 Dec-13 Sep % BVIC's Non-Performing Loan (IDR, bn) BVIC's CAR (%) Source: PT Bank Victoria International Tbk., Bloomberg, PEFINDO Research & Consulting - March 31, 2015 Page 7 of 11

8 TARGET PRICE VALUATION Methodology We applied the income approach using Excess Return Method (ERM) as the main valuation approach considering that income growth is a value driver in BVIC instead of asset growth. Furthermore, we also applied the Guideline Company Method (GCM) as a comparison method. This valuation is based on 100% share price as of March 30, 2015, using BVIC s financial report as of September 30, 2014, for our fundamental analysis. Value Estimation We used a Cost of Equity of 10.32% based on the following assumptions: Table 4: Assumption Risk free rate [%]* 7.43 Risk premium [%]* 3.43 Beta [x]** 0.84 Cost of Equity [%] Source: Bloomberg, PEFINDO Research & Consulting - Estimates Notes: * As of March 30, 2015 **PEFINDO Beta Saham report as of March 26, 2015 Target price for 12 months based on valuation as of March 30, 2015, is as follows: Using the ERM method with a discount rate assumption of 10.32% is IDR452 IDR473 per share. Using the GCM method (PBV 0.75X and P/E 10.84X) is IDR198 IDR339 per share. In order to obtain a value which represents both value indications, we have weighted both ERM and GCM methods by 70%:30%. Based on the above calculation, the target price of BVIC for 12 months is IDR376 IDR432 per share. Table 5: Summary of ERM Method Valuation Beginning book value of equity [IDR, bn] Conservative Moderate Aggressive 1,795 1,795 1,795 PV equity excess return [IDR bn] Terminal Value excess return [IDR, bn] Total Equity Value [IDR bn] 3,224 3,299 3,374 Number of Share, [mn shares] 7,139 7,139 7,139 Fair Value per Share, [IDR] Source: PEFINDO Research & Consulting - Estimates March 31, 2015 Page 8 of 11

9 Table 6: GCM Comparison BVIC INPC BACA AGRO Average Valuation, March 30, 2015 P/E [x] P/BV [x] Source: Bloomberg, PEFINDO Research & Consulting - Estimates Table 7: Summary of GCM Method Valuation Multiples (x) Est. EPS (IDR) Est. BV/Share (IDR) Value (IDR) P/BV P/E Source: Bloomberg, PEFINDO Research & Consulting - Estimates Table 8: Fair Value Reconciliation Fair Value per Share [IDR] ERM GCM Average Upper limit Bottom limit Weight 70% 30% Source: PEFINDO Research & Consulting - Estimates March 31, 2015 Page 9 of 11

10 Table 9: Consolidated Statements of Comprehensive Income (IDR billion) P 2015P Interest income 851 1,117 1,601 2,016 2,487 Interest expenses (679) (779) (1,124) (1,557) (1,846) Net interest income Other operating income Other operating expenses (48) (188) (269) (290) (322) Income from Operations Pre-tax Profit Tax (52) (47) (67) (56) (83) Figure 7: Historical P/E and P/BV P/E P/E P/BV P/BV Net Profit Estimates Table 10: Consolidated Statements of Financial Position (IDR billion) P 2015P Assets Cash Placement with BI & Other bank 2,703 2,421 4,035 4,607 4,790 Marketable securities 3,208 3,952 3,602 3,724 3,957 Figure 8: Historical ROA, ROE and TAT ROA, ROE 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% TAT (x) ROA (%) ROE (%) TAT Loans 5,559 7,581 11,076 12,449 13,869 Fixed assets Other assets Total Assets 11,803 14,353 19,171 21,526 23,521 Liabilities Demand deposit , Saving deposit Time deposit & certificate deposit 8,264 9,770 13,328 15,682 16,936 Deposit from other banks ,226 1,215 1,276 Securities issued ,082 Other liabilities & accrued Total Liabilities 10,590 12,884 17,527 19,631 21,277 Total Equity 1,212 1,469 1,645 1,895 2,243 Estimates Source: PT Bank Victoria International Tbk., PEFINDO Research & Consulting - Table 11: Key Ratio Growth (%) Ratio P 2015P Interest income Total income (10.2) Operating Profit (16.6) 58.0 Net Profit (15.1) 58.9 Profitability (%) Operating margin Net Margin ROA ROE Solvability (%) BOPO LDR CASA Estimates March 31, 2015 Page 10 of 11

11 DISCLAIMER This report was prepared based on trusted and reliable sources. Nevertheless, we do not guarantee its completeness, accuracy and adequacy. Therefore, we are not responsible for any investment decisions made based on this report. All assumptions, opinions and predictions were solely our internal judgments as of the reporting date, and those judgments are subject to change without further notice. We are not responsible for any mistakes or negligence that occurs by using this report. Recent performance cannot always be used as a reference for future outcome. This report does not offer a recommendation to purchase or hold particular shares. This report might not be suitable for some investors. All opinions in this report have been presented fairly as of the issuing date with good intentions; however, they could change at any time without further notice. The price, value or income of each share of the Company stated in this report might be lower than investor expectations, and investors may obtain returns lower than the invested amount. Investment is defined as the probable income that will be received in the future; nonetheless such returns may fluctuate. As for companies whose shares are denominated in a currency other than Rupiah, foreign exchange fluctuation may reduce their share value, price or the returns for investors. This report does not contain any information for tax considerations in investment decision-making. The share price target in this report is a fundamental value, not a fair market value or a transaction price reference required by regulations. The share price target report issued by the PT PEFINDO Riset Konsultasi ( PRK ) or PEFINDO Research and Consulting is not a recommendation to buy, sell or hold particular shares. It should not be considered as investment advice from the PRK and its scope of service to some parties, including listed companies, financial advisors, brokers, investment banks, financial institutions and intermediaries, does not correlate with receiving rewards or any other benefits from such parties. This report is not intended for any particular investor and cannot be used as part of an objective investment analysis of particular shares, an investment recommendation, or an investment strategy. We strongly recommend investors to consider the suitability of the situation and conditions before making a decision in relation with the figures in this report. If necessary, consult with your financial advisor. PEFINDO keeps the activities of the Equity Valuation Division separate from its Ratings Division to preserve the independence and objectivity of its analytical processes and products. PEFINDO has established policies and procedures to maintain the confidentiality of non-public information received in connection with each analytical process. The entire process, methodology and the database used in the preparation of the Reference Share Price Target Report as a whole are different from the processes, methodologies and databases used by PEFINDO in issuing ratings. This report was prepared and composed by PRK with the objective of enhancing the transparency of share prices of listed companies in the Indonesia Stock Exchange (IDX). This report is also free of influence from any other party, including pressure or force either from IDX or the listed company reviewed. PRK earns a reward amounting to IDR20 million from IDX and the reviewed company for issuing this report twice a year. For further information, please visit our website at This report was prepared and composed by the PEFINDO Research & Consulting - Equity & Index Valuation Division. In Indonesia, this report is published in our website and in the IDX website. March 31, 2015 Page 11 of 11