Bank Rakyat Indonesia poised for double-digit earnings growth

Potential savings between $217m to $363m could buoy the bank from a three-year decline.

Bank Rakyat Indonesia is recovering from a protracted three-year slump as UOB Kay Hian forecasts that it is poised for double-digit earnings growth in 2018 amid high potential savings for the year ahead.

Coverage ratio could come in lower at a minimum of 170% for 2018 from 196% and targets cost of credit at 2-2.2% which gives potential savings from $217.9m to $363.17m (Rp3t to 5t).

The bank is also buoyed by improving asset quality as insurance in micro loans is insulating it from the adverse effects of non performing loans.

“BBRI has done a good job in 2017, maintaining opex discipline (+10% yoy). We had said that BBRI needs to keep opex growth at below loan growth to see economies of scale due to BBRI’s more intensive-labour business model,” said UOB Kay Hian analyst Alexander Margaronis.

The momentum in fee income growth was also the second highest amongst its peers after rising 12% YoY in 2017. Loan admin fee witnessed the strongest growth of 27.5% last year thanks to new KUR (Kredit Usaha Rakyat or social working capital loans) segment as BBRI has the largest KUR distribution budget or 2017-18.

Here’s more from UOB Kay Hian: 

BBRI recorded the highest PPOP growth among peers in 2017 (+13% yoy) due to moderate net interest income growth, opex discipline and fee income growth. We estimate PPOP growth to slightly weaken to mid- to high-single-digit in 2018 due to higher pressure on cost of funds (larger deposit sizes) and loan yields.

NIM pressure will persist due to lower yields from SME, consumer and corporate loan. BBRI’s average loan yield dropped 50bp in 2017 on the new KUR rate and lower interest rates at its other segments. BBRI said it will not be aggressive in SOE infrastructure-related loans and will keep the SOE loans at about 20% of total loans or even lower. This should be mildly able to withstand yield pressures. We expect loan yields for BBRI to come down slightly, in line with the industry’s, with 10-20bp NIM compression assuming stable cost of funds.

New KUR rate impact to be slowly absorbed by strong new KUR loan growth. The government has reduced KUR (Kredit Usaha Rakyat, or social working capital loans) lending rates to customers to 7% in 2018 (2017: 9%) and reduced government subsidy rate to banks by 1%. We estimate the 1% cut in subsidy rate to banks could have an impact of up to 100bp on the NIM of the KUR segment, and up to 200bp impact on earnings. The impact is absorbed as new micro KUR loans (2017: +16% yoy) are replacing old micro loan products.