Download PDFOn more solid growth foundation
- 1H18 profit up 28% yoy off low-base; core profit grew 8% (in-line).
- Top line growth was lacking due to slow asset growth, lower NIMs.
- Credit cost has improved but new NPLs remain at elevated levels.
- Reiterate BUY with lower TP (Rp8,300) due to higher cost of capital.
Results in-line. reported net profit of Rp12.2tn in 1H18 (+28.7%), with its 2Q/1Q profits forming 25%/23% of our FY18F forecasts of Rp25.2tn (in-line), albeit this was partly helped by one-off tax-case provisioning reversal of Rp1.08tn in 2Q after the bank won a Supreme Court ruling in May on its long-standing tax dispute with the tax authorities. However, 's strong profit growth was also off a low-base in 1Q17 and mainly driven by its falling loan provisions (-15%) while its core profit ( PPOP ) grew only modestly by 7.6% in 1H (or only 2% growth if excluding the tax-case provision reversal). Despite lacking top-line growth, we believe is now on a more solid foundation to grow earnings as NPL risks are diminishing and its credit costs are normalising in the coming years.
Slow top-line growth. 's weak top-line growth can be attributed to its slow asset growth of 8.3% (loans: +12%; deposits: +5%) as it mitigated NIM pressure by slowing deposit growth. In our calculation, NIMs narrowed to 5.57% (-17bps) as the fall in its IDR loan yield to 9.9% in 2Q18 (-60bps yoy) was steeper than that of its IDR cost of funds (at 2.9%; -40bps yoy) despite slower growth of customer deposits vs. loan portfolio. As such, we lower our FY18F NIM assumption by 12bps to 5.43% vs. revised guidance of 5.5%-5.7% (from 5.7%-5.8%).
Asset quality. 's credit cost improved significantly to 2.1% in 1H18 (1H17: 2.9%; FY17: 2.3%) while its NPL ratio declined to 3.1% in 2Q vs. 3.3% in 1Q and 3.8% a year ago. However, the bank's new NPLs formation of Rp8.2tn in 1H18 (2.6% of loans) remained at elevated levels albeit still in-line with guidance of Rp15-16tn for FY18F. New NPLs came from commercial & SME loans, each at 6% of loans vs. 4% for micro, 1.5% for consumer loans. The bank still maintained its credit cost guidance of 2.0-2.2% for FY18F and expects credit cost to normalise to a steady-state rate of 1.5% by 2020 as its loan portfolio shifts towards lower-risk corporate & consumer loans, away from commercial & SME loans.
Valuation. We keep our earnings forecasts largely unchanged but lower our TP to Rp8,300 (from Rp9,500) due to our 50bps higher cost of capital assumption to reflect rising 10-yr yields during the second quarter. Our TP is based on our GGM-derived target FY18F P/B of 2x, assuming LT ROAE of 16.6%, growth of 8.5%, and cost of equity of 12.5% (from 12%). We estimate 's LT ROAE based on DuPont analysis, assuming LT ROAA of 2.08% and asset/equity leverage of 8x. We maintain our BUY rating.
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