Bank Bukopin, Seeking New Opportunities

Our top pick in the small cap space
We continue to highlight BBKP as our top pick in the small cap banking space. Its current valuations – FY12f PER of 6.3x and P/BV of 1.0x – are undemanding, given the vast opportunities that the bank can exploit to improve its earnings profile. It has a decent liabilities profile and NIM showed encouraging signs of improvement in 3Q11, although asset quality remains a key risk. Maintain BUY with a Target Price of IDR850, which implies a FY12f of 8.7x and P/BV of 1.4x.

Serious efforts to enhance NIM
BBKP has a decent deposit strength considering its asset size, being the 13th largest. Its savings deposits have grown at 4-year CAGR of 39% and its CASA mix has consistently been in the top ten. The key to enhancing its NIM would largely depend on its asset mix and growth, which has shown credible progress recently.

Non-Bulog loans (about 79% of its loan book) grew 10% q-o-q, 27% YTD; 36% y-o-y, which helped boost asset yields and NIM in 3Q11. This is the first real improvement since its rights issue, which was undertaken largely to expand its credit profile outside the low-yielding Bulog business. Taspen (about 4% of its loan book) also grew healthily (6% q-o-q, 36% y-o-y), with bigger and multiple cross-selling opportunities available via its Jamsostek cooperation.

Asset quality admittedly a risk
Credit quality is the biggest risk to the bank’s performance in our view, as it climbs a steep learning curve in the non-Bulog area. In general, the commercial and SME space (relative to consumer) is also more prone to NPL risk. Gross NPL ratio inched up sequentially to 3.4% in 3Q11, with absolute NPLs rising 24% q-o-q and 23% y-o-y.

The bank also has a non-Bulog gross NPL ratio of about 4%, which is a significant 120bpts above the industry ratio. The historical performance of its asset quality also indicates that the bank is exposed to high NPL risks, with gross NPL hitting as high as 4.8% in 4Q08–1Q09. The loan loss coverage ratio was also relatively low and stood at 76% as of 3Q11.

More capital needed
Tier-1 and CAR have fallen rapidly from 16.0% and 16.7% in 1Q11 (post-rights issue) to 13.0% and 13.5% respectively in 3Q11, as the bank ventured out of Bulog loans and expanded into new areas. The bank is currently preparing a subordinated debt issuance, of which every IDR100bn raised may lift the bank’s CAR by about 35bpts.