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21% upside. Buy.
1 April, 2020
Target price Rp1250
Focus on quality assets
FY19 loan growth was only 1% compared to 9% in FY18 as the Bank focused more on the settlement of problem loans. The growth of higher quality book loans in 2019 was 8.5% or higher than industry credit growth average of 6.1%. BNLI will focus on the growth of high quality assets and assets that have high rates of return so that they can significantly increase operating revenue. Credit growth in 2020 is projected to be in the range of 8-10% (low double-digit). Because of the Covid-19 Pandemic, the bank will review all targets as economic conditions develop.
Net Interest Margin up 4.4%
In FY19, NIM rose to 4.4% compared to 4.1% in FY18 from increased net interest income due to the improved quality of bank assets, lower interest payments for sub debt, higher yield loans and a rising portion of lower cost CASA deposits. After the BI rate cut to 4.5%, BNLI will adjust interest rates gradually so we expect they will be able to maintain NIM in the short term. Meanwhile, the bank will focus on efforts to increase high yield assets and the portion of low-cost funds (CASA) so we expect the NIM to increase in the longer term.
Provision Expense has increased significantly
Provision expenses increased significantly in 4Q19, up by 33% from the FY18 level. This was related to the Bank’s efforts to improve the quality of credit assets and meet the required adequacy of impairment losses (CKPN) in accordance with the IFRS 9 requirements. BNLI has fully implemented IFRS 9 as of January 1, 2020 and the capital impact is not significant, so the bank's CAR is still far above the minimum regulatory requirement. With the adoption of IFRS 9, the bank’s cost of credit in 2020 is projected to be in the range of 1-2%.
Valuation: 21% Upside, Buy.
Based on our DDM Valuation, we have a target price within one year of IDR 1250, which means the shares are trading at 1.1x PBV and gives 21% potential upside. Buy.