Indonesia Company Guide Version 5 Bloomberg: PNBN IJ Reuters: PNBN.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 1 Aug 2016 BUY (Upgrade from HOLD) Last Traded Price: Rp780 (JCI : 5,215.99) Price Target : Rp1,000 (28% upside) (Prev Rp800) Potential Catalyst: Potential M&A target Where we differ: Earnings above consensus for FY17F probably on more aggressive growth assumption Analyst Sue Lin LIM +65 6682 3711 suelinlim@dbs.com Benedictus Agung SWANDONO +6221 3003 4935 agung.swandono@id.dbsvickers.com What s New 2Q16 earnings in line, lifted by sustained NIM and decent loan growth NPL ratio crept up as expected; higher provisions erase gains Undervalued preposition; stock price is lagging behind the recent banking sector rally Upgrade to BUY; TP lifted to Rp1,000 on lower risk free rate assumption Price Relative 1,486.0 1,286.0 1,086.0 886.0 686.0 Rp 486.0 60 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 (LHS) Relative JCI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (Rp Rpbn bn) 2015A 2016F 2017F 2018F Pre-prov. Profit 3,788 4,088 4,583 5,143 Net Profit 1,407 2,061 2,510 2,931 Net Pft (Pre Ex.) 1,407 2,061 2,510 2,931 Net Pft Gth (Pre-ex) (%) (40.3) 46.5 21.8 16.7 EPS (Rp) 58.4 85.6 104 122 EPS Pre Ex. (Rp) 58.4 85.6 104 122 EPS Gth Pre Ex (%) (40) 46 22 17 Diluted EPS (Rp) 58.4 85.6 104 122 PE Pre Ex. (X) 13.3 9.1 7.5 6.4 Net DPS (Rp) 0.0 0.0 0.0 0.0 Div Yield (%) 0.0 0.0 0.0 0.0 ROAE Pre Ex. (%) 5.7 7.8 9.8 10.4 ROAE (%) 5.7 7.8 9.8 10.4 ROA (%) 0.9 1.2 1.4 1.5 BV Per Share (Rp) 1,178 1,007 1,111 1,233 P/Book Value (x) 0.7 0.8 0.7 0.6 Earnings Rev (%): (3) (2) (1) Consensus EPS (Rp Rp): 85.2 95.5 123 Other Broker Recs: B: 2 S: 0 H: 1 Source of all data: Company, DBS Bank, Bloomberg Finance L.P 220 200 180 160 140 120 100 80 Undervalued proposition Upgrade to BUY; as stock has been a laggard. (PNBN) s stock price performance has been flat year-to-date, while the sector has rallied more than 10%. However, we believe the bank s fundamentals remain on track to deliver above average earnings growth. PNBN has gained a reputation for its cautiousness and prudent credit policies, which helped it to navigate across the credit cycle. Such practices are still followed today. 2Q16 earnings in line; ; modest loan growth but higher NIM. PNBN s 1H16 net profit of Rp1.1tr (+11%y-o-y) represented 53% of both ours and consensus full year net profit estimates. 2Q16 earnings were 9% lower q-o-q but 31% higher y-o-y. Loans grew modestly at 5% y-o-y and 6% q-o-q driven by construction loans which jumped 20% y-o-y. NIM was higher compared to a year ago, mainly due to lower cost of funds after the 100bps cut in the reference rate since the beginning of this year. NPL in 2Q16 crept up to 2.8% from 2.6% in 1Q16 due to downgrades in construction and manufacturing sector. We have tweaked our forecasts slightly to account for higher NPLs. M&A still on the cards. Talk on the street is that ANZ will sell out of PNBN. We understand that the glitch remains with the board representation which needs to be sorted out. The 39% stake owned by ANZ, if sold, could trigger a tender offer, but whether that materialises will depend on Panin Financial, i.e. the ultimate family owner. In the longer run, we would not discount the possibility of the family eventually selling out. Valuation: Upgrade to BUY; ; Rp1000 TP. We believe the stock has been left out during the recent rally in the banking sector. Currently the bank is trading at low 0.8x FY16 BV. PNBN offers solid fundamentals with potential M&A play. We upgrade our TP to Rp1,000 (equivalent to 1.0x FY16 BV) to factor in lower risk free rate assumption to 7.2% from 8.8%. Our TP does not include a premium for any potential M&A deal, which could value the bank as high as 1.4-1.5x BV. Key Risks to Our View: M&A carries timing and tender offer risks. PNBN s share price remains vulnerable to M&A rumours. Recall that BTPN s share price jumped c.20% within a month after announcing the M&A with Sumitomo Mitsui Banking Corporation (SMBC) but retreated in the subsequent month as there was no tender offer made to minorities. PNBN could be caught in a similar situation if there no tender offer made. At A Glance Issued Capital (m shrs) 24,088 Mkt. Cap (Rpbn/US$m) 18,788 / 1,437 Major Shareholders (%) Panin Financial Tbk (%) 46.0 ANZ Banking Group LTD (%) 38.8 Free Float (%) 15.2 3m Avg. Daily Val (US$m) 0.32 ICB Industry : Financials / Banks ed: JS / sa: MA
WHAT S NEW 2Q16 results on track; undervalued proposition 2Q16 earnings in line. PNBN s 1H16 net profit of Rp1.1tr (+11%y-o-y) represented 53% of both ours and consensus full year net profit estimates. 2Q16 earnings was 9% lower q-o-q but 31% higher y-o-y. Higher NIM from lower funding cost. NIM in 1H16 increased 70bps to 4.8% compared to the corresponding period a year ago, mainly due to lower cost of funds after the 100bps cut in the reference rate since the beginning of this year. Meanwhile, non-interest income grew 31% y-o-y, thanks to gains from the sale of marketable securities. This could have been triggered by the recent rally in the bond market and PNBN s exposure to T Bills and Securities, which comprise 13% of it earning assets. These positives, however, were offset by higher provisions in 1H16 (+162% y-o-y). Operating expenses were kept in check with cost to income ratio improving to 50% in 1H16 (vs 56% in 1H15) Loans grew 5% y-o-y y y driven by construction loans. Loans grew modestly at 5% y-o-y and 6.3% q-o-q, driven by construction loans which jumped 20% y-o-y. NPL crept up to 2.8% in 2Q16. NPL in 2Q16 crept up to 2.8% from 2.6% in 1Q16 due to some downgrades in the construction and manufacturing sectors. Despite the higher NPL, coverage ratio increased to a comfortable level of 104% from 100% in 1Q16. Maintained solid liquidity and capital position. Both CASA and time deposits grew by 9% y-o-y, leaving the CASA ratio unchanged at 38%. LDR remained flattish at c.100%. PNBN s capital position continues to be strong with CAR at 20%. Outlook. Limited impact on NIM from regulatory pressures. PNBN has kept its NIM at the historical 4%-5% level, thus we believe that the regulator's pressure to lower lending rates to single digits should be limited, in our view. The lower cost of funds from lower policy rates should keep NIM at bay in 2H16. NPL may not have peaked ed yet. Despite its conservative stance, PNBN is also plagued with asset quality issues like most of the banks in the industry. As expected, NPL ratio and restructured loans in 2Q16 continued to creep up. We expect to see more of this for at least another quarter while improvements on asset quality should be seen once economic growth picks up. We raised our NPL ratios across FY16-18F which resulted in a 1-3% cut to our earnings for the period. Loan growth will only benefit from secondary effects of infra spending. Management is guiding for 10-12% loan growth for 2016, mainly driven by SME and consumer loans. PNBN has historically been strong in the SME segment and remains so. As such, PNBN will unlikely be an early beneficiary of the infrastructure spending boom but will only benefit later. PNBN should start to feel the trickle-down effect from its SME clients in FY17F, in our view. Tax amnesty could be a positive catalyst. PNBN has been appointed as one of the perception banks (Bank Persepsi) to help facilitate the tax amnesty programme. Success of the tax amnesty programme, especially if it is followed by funds repatriation, should be beneficial to the bank, in our view. Valuation and recommendation We upgrade our recommendation to BUY as we believe PNBN has been left out during the recent rally in the banking stocks. PNBN offers solid fundamentals and is a potential M&A play. We upgrade our TP to Rp1,000 after imputing lower risk free rate assumption of 7.2% from previously 8.8% after sustained low risk free rate. Our TP is implies 1.0x FY16F BV using Gordon Growth Model (21% ROE, 11% growth and 14% cost of equity). Page 2
Quarterly / Interim Income Statement (Rpbn) FY Dec 2Q2015 2015 1Q2016 2Q2016 2016 % chg yoy % chg qoq Net Interest Income 1,737 1,998 2,103 21.1 5.3 Non-Interest Income 230 304 443 92.5 45.7 Operating Income 1,967 2,302 2,546 29.5 10.6 Operating Expenses (1,165) (1,164) (1,274) 9.4 9.4 Pre-Provision Provision Profit 802 1,138 1,272 58.6 11.8 Provisions (219) (355) (572) 161.5 61.2 Associates 0.0 0.0 0.0 nm nm Exceptionals 0.0 0.0 0.0 nm nm Pretax Profit 609 790 709 16.3 (10.3) Taxation (165) (191) (161) (2.5) (15.8) Minority Interests (45.0) (24.9) (23.9) (46.9) (4.0) Net Profit 400 574 524 31.1 (8.7) Growth (%) Net Interest Income Gth 7.6 1.6 5.3 Net Profit Gth (32.0) 122.1 (8.7) Key ratio (%) NIM 4.1 5.0 4.8 NPL ratio 1.8 2.6 2.8 Loan-to deposit 100.6 95.9 97.2 Cost-to-income 59.2 50.6 50.0 Total CAR 16.9 20.1 20.0 Source of all data: Company, DBS Bank Page 3
CRITICAL DATA POINTS TO WATCH Earnings Drivers: Sticking to its niche in SME. PNBN has always focused on the SME and commercial segments, particularly traders. Management expects to maintain 45% of its portfolio on SME loans and 15% on corporate loans. Management admitted they have no exposure on infrastructure projects and only expect a trickle-down effect. As such, we believe loan growth should be a modest 7% this year. NIM to stay stable. PNBN should enjoy lower time deposit rates from lower BI rate and deposit rate cap of BI rate +100bps. Time deposit rate has also gained importance for PNBN due to the lower CASA ratio. However, management sees tougher competition this year, limiting NIM upside. Average loan yield last year of 11.5% was the highest in five years and is not sustainable, in our view. Lending rates should also be adjusted with lower cost of funds since PNBN uses a cost-plus formula to price its loans. We expect NIM to stay flat at c.4% in FY16. Maintain liquidity, CASA ratio lower than historical levels. PNBN will keep its loan-to-deposit around the 90% level for 2016. Od its earning assets, 22% was allocated to the short-term money market (2-3 weeks) and marketable bonds to preserve liquidity. PNBN believes that it will be challenging for CASA ratio to revert to the 60% level and it will remain at the mid-40% level due to tighter competition in gathering CASA deposits. No significant increase in operating expenses. PNBN has been conservative in expanding the number of branches this year due to the slow economic environment. Opex should grow at similar rates in the past while cost-to-income should remain stable in the mid 50% level. Limited regulatory risk. PNBN has historically maintained its NIM level at the low 4% level while loan yield hovers between 10% and 11%. We believe the government's intention to either trim down lending rate to single digit or cap NIM at 4% should have minimal impact to PNBN. Normalising credit costs. PNBN has historically booked lower provisions due to its good asset quality management. Provision charge-off rate averaged 0.9% in the last five years. However, pre-implementation of PSAK 50/55, PNBN was conservative with provisions and booked high provision charge-off rates at the 1% level. Post-PSAK 50/55 (from 2011), provision chargeoff rates dropped to the 0.4-0.5% level. The slow economic environment in 2015 induced the bank to undertake aggressive provisioning with provision charge-off rates jumping to 1.3%, sending coverage ratio to a historical high of 118%. We expect the ratio to normalise at 0.8% with coverage ratio maintained above the 100% level. Rp bn 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 190,750 180,750 170,750 160,750 150,750 140,750 130,750 120,750 110,750 100,750 12,000 10,000 8,000 6,000 4,000 2,000 0 0 Rp bn Rp bn Margin Trends Net Interest Income Gross Loan& Growth Customer Deposit & Growth Loan-to-Deposit Ratio Trend Cost & Income Structure Net Interest Income Margin Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS) Customer Deposits (LHS) Customer Deposits Growth (%) (YoY) (RHS) Loans Deposit Loan-to-Deposit Ratio (RHS) 4.4% 4.3% 4.2% 4.1% 4.0% 3.9% 3.8% 3.7% 3.6% 3.5% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 104% 99% 94% 89% 84% 79% 0.55 0.545 0.54 0.535 0.53 0.525 0.52 Net Interest Income Non-interest Income Cost-to-income Ratio Source: Company, DBS Bank Page 4
Balance Sheet: Asset quality to stabilise by end of 2016. A prudent growth strategy has always been PNBN s priority and the majority of its SME and commercial loans are fully collateralised. As a result, PNBN has always maintained an NPL ratio of below 2% and provision expenses have been low, except for FY15. FY16F remains a challenging year with NPL ratios rising in 1H16, but we expect asset quality to stabilise towards the end of 2016. Strong capitalisation. Capitalisation has been strong due to its conservative growth and high-quality loan book, as well as strong capital boost from retained earnings due to its zerodividend payout policy. Share Price Drivers: Quality earnings; potential M&A target. PNBN has always focused on a conservative but high quality growth strategy with all loans fully collateralised. Asset quality has always been at manageable levels. PNBN is also a potential M&A target because of its attractive valuation. The potential divestment of ANZ's 39% stake in PNBN may be a share price catalyst. The 39% stake owned by ANZ, if sold, could trigger a tender offer, but whether this will materialise will depend on Panin Financial, i.e. the ultimate family owner. In the longer run, we would not discount the possibility of the family eventually selling out. Key Risks: Further asset quality deterioration. PNBN saw its NPL ratio creeping up to 2.8% in 2Q16. This is the highest NPL ratio since 2012. Restructured loans were also significantly higher. Asset quality should be closely monitored this year. 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 22.0% 21.0% 20.0% 19.0% 18.0% 17.0% 16.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Asset Quality NPL Ratio Provision Charge-Off Rate Capitalisation (%) Tier-1 CAR Total CAR ROE (%) Company Background (PNBN) is one of the largest privately owned local banks in Indonesia, behind BBCA and Permata. PNBN focuses on disbursing loans to SMEs in the growing trade industry. (x) 22.1 17.1 Forward PE Band (x) +2sd: 18.6x +1sd: 14.5x 12.1 Avg: 10.5x 7.1-1sd: 6.4x 2.1 Jul-12 Jul-13 Jul-14 Jul-15-2sd: 2.4x 1.6 (x) PB Band (x) 1.4 1.2 1.0 0.8 0.6 +2sd: 1.4x +1sd: 1.19x Avg: 0.98x -1sd: 0.77x -2sd: 0.56x 0.4 Jul-12 Jul-13 Jul-14 Jul-15 Source: Company, DBS Bank Page 5
Key Assumptions FY Dec Gross Loans Growth 8.7 5.7 10.0 12.0 12.0 Customer Deposits Growth 4.9 1.8 10.0 10.0 10.0 Yld. On Earnings Assets 9.6 10.0 9.2 9.0 8.9 Avg Cost Of Funds 6.5 6.6 5.9 5.7 5.6 Income Statement (Rpbn) FY Dec Net Interest Income 5,846 6,729 7,077 7,808 8,719 Non-Interest Income 2,240 1,491 1,892 2,149 2,362 Operating Income 8,085 8,219 8,969 9,957 11,081 Operating Expenses (4,289) (4,431) (4,882) (5,374) (5,937) Pre-provision Profit 3,796 3,788 4,088 4,583 5,143 Provisions (439) (1,363) (1,060) (890) (831) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 3,477 2,458 3,062 3,730 4,354 Taxation (894) (890) (766) (933) (1,089) Minority Interests (227) (161) (236) (287) (335) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,356 1,407 2,061 2,510 2,931 Net Profit bef Except 2,356 1,407 2,061 2,510 2,931 Growth (%) Net Interest Income Gth (0.5) 15.1 5.2 10.3 11.7 Net Profit Gth 4.2 (40.3) 46.5 21.8 16.7 Margins, Costs & Efficiency (%) Spread 3.1 3.4 3.4 3.3 3.3 Net Interest Margin 3.7 4.1 4.0 4.0 4.0 Cost-to-Income Ratio 53.0 53.9 54.4 54.0 53.6 Business Mix (%) Net Int. Inc / Opg Inc. 72.3 81.9 78.9 78.4 78.7 Non-Int. Inc / Opg inc. 27.7 18.1 21.1 21.6 21.3 Fee Inc / Opg Income 5.4 6.8 5.5 5.5 5.4 Oth Non-Int Inc/Opg Inc 22.3 11.3 15.6 16.1 15.9 Profitability (%) ROAE Pre Ex. 11.9 5.7 7.8 9.8 10.4 ROAE 11.9 5.7 7.8 9.8 10.4 ROA Pre Ex. 1.5 0.9 1.2 1.4 1.5 ROA 1.5 0.9 1.2 1.4 1.5 Source: Company, DBS Bank Provisions should moderate this year Tougher competition should limit NIM expansion Page 6
Quarterly / Interim Income Statement (Rpbn) FY Dec 2Q2015 2015 3Q2015 4Q2015 1Q2016 2Q2016 2016 Net Interest Income 1,737 1,851 1,967 1,998 2,103 Non-Interest Income 230 225 338 304 443 Operating Income 1,967 2,076 2,305 2,302 2,546 Operating Expenses (1,165) (1,313) (1,181) (1,164) (1,274) Pre-Provision Provision Profit 802 763 1,124 1,138 1,272 Provisions (219) (540) (371) (355) (572) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Pretax Profit 609 260 720 790 709 Taxation (165) (63.8) (441) (191) (161) Minority Interests (45.0) (35.4) (20.6) (24.9) (23.9) Net Profit 400 161 259 574 524 Growth (%) Net Interest Income Gth 7.6 6.6 6.3 1.6 5.3 Net Profit Gth (32.0) (59.8) 60.9 122.1 (8.7) Improved non-interest income offset by higher provisions Balance Sheet (Rpbn) FY Dec Cash/Bank Balance 13,910 14,026 9,328 8,064 6,196 Government Securities 14,157 9,154 9,727 10,341 10,998 Inter Bank Assets 3,354 7,745 9,293 11,152 13,382 Total Net Loans & Advs. 111,944 117,744 129,161 144,587 161,964 Investment 13,772 12,751 13,203 13,678 14,177 Associates 0.0 0.0 0.0 0.0 0.0 Fixed Assets 2,502 9,134 8,888 8,621 8,334 Goodwill 0.0 0.0 0.0 0.0 0.0 Other Assets 12,944 12,568 13,875 15,618 17,693 Total Assets 172,582 183,121 193,476 212,061 232,745 Loan growth targeted at 10-12% Customer Deposits 126,105 128,316 141,148 155,263 170,789 Inter Bank Deposits 4,753 5,495 5,769 6,058 6,361 Debts/Borrowings 11,081 9,752 10,383 11,274 12,299 Others 7,414 8,752 9,239 9,732 10,296 Minorities 2,253 2,455 2,691 2,978 3,313 Shareholders' Funds 20,976 28,351 24,246 26,756 29,687 Total Liab& S/H s Funds 172,582 183,121 193,476 212,061 232,745 Source: Company, DBS Bank Page 7
Financial Stability Measures (%) FY Dec Balance Sheet Structure Loan-to-Deposit Ratio 88.8 91.8 91.5 93.1 94.8 Net Loans / Total Assets 64.9 64.3 66.8 68.2 69.6 Investment / Total Assets 8.0 7.0 6.8 6.5 6.1 Cust. Dep./Int. Bear. Liab. 86.9 86.6 86.6 86.4 86.3 Interbank Dep / Int. Bear. 3.3 3.7 3.5 3.4 3.2 Asset Quality NPL / Total Gross Loans 2.0 2.2 2.8 2.4 2.1 NPL / Total Assets 1.3 1.4 1.9 1.7 1.5 Loan Loss Reserve Coverage 88.9 102.6 88.5 105.3 119.6 Provision Charge-Off Rate 0.4 1.1 0.8 0.6 0.5 Capital Strength Total CAR 21.6 20.2 19.9 18.9 18.3 Tier-1 CAR 17.3 17.6 17.6 16.9 16.5 Similar to peers, NPL ratios are higher Source: Company, DBS Bank Target Price & Ratings History Rp 2 1032 1 3 932 4 5 832 8 12 732 9 10 6 7 11 632 532 Jul-15 Nov-15 Mar-16 Note : Share price and Target price are adjusted for corporate actions. S.No. Date Closing Price Target Rating Price 1: 31 Jul 15 1065 950 HOLD 2: 10 Aug 15 1040 950 HOLD 3: 03 Sep 15 1025 1000 HOLD 4: 30 Sep 15 885 1000 HOLD 5: 30 Oct 15 930 900 HOLD 6: 07 Mar 16 605 900 HOLD 7: 30 Mar 16 695 800 BUY 8: 11 Apr 16 800 800 BUY 9: 02 May 16 760 800 HOLD 10: 19 May 16 680 800 HOLD 11: 30 May 16 710 800 HOLD 12: 14 Jul 16 735 800 HOLD Source: DBS Bank Page 8
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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