Bank Rakyat Indonesia, Banking On Its Forte

BBRI’s investments in the micro business ensures sustainability of its micro lending market share, growth and asset quality. An enlarged network, growing e-banking and emphasis on deposits should protect BBRI’s funding profile. The earnings risks are rising credit cost and NIMs. BBRI is our Top Pick as its share price correction has driven its multiples to levels we find most appealing in the large cap space.

Fortifying its stronghold
Amidst an expected moderation in industry credit growth, we find comfort in Bank Rakyat Indonesia’s (BBRI) micro loans, which we expect to surge 22% in 2014. Its unrivalled edge in the micro business is fortified by its steady investments in enlarging its footprint – BBRI plans to add up to 3,000 new loan officers, 100 micro units and 300 Teras outlets – all of which are critical in sustaining its market share, asset quality and credit growth. We expect the contribution of micro to total loans to rise to 31% in 2014.

2014 is a “funding year”
BBRI regards 2014 as the year for funding and has tilted its emphasis towards generating low cost deposits. Time deposits (TDs) have grown faster than CASA in the last four quarters and the bank has adjusted deposit rates higher, indicating a growing need for funding as its IDR loan-to-deposit ratio (LDR) has hit 92%.

We expect its cost of funds to go up 30bps in 2014. Note that BBRI’s ability to penetrate into micro deposits is exemplary, as indicated by a healthy 17% y-o-y rise. We believe its aggressive mobile Teras initiative, push for funding and enlarged capacity will bolster deposit growth.

Fee income to bolster earnings
We expect BBRI’s fee income (9% of total income, 22% y-o-y) to improve as it expands its e-banking segment. We see two key risks to earnings: i) normalization of credit costs (9M13: 3% y-o-y; 75bps of gross loans) on potential non-performing loans (NPLs), and ii) net interest margin (NIM) contraction.

Most appealing valuation, strongest ROAE
BBRI is our Top Pick as we move into 2014. Its price correction has driven the stock to levels we deem most appealing among our large cap universe, especially stacked against its expected ROAE.