Bank Tabungan Negara (BBTN IJ; Sell; TP IDR1,100) Company Update: A Silver Lining On The Horizon?

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Bank Tabungan Negara (BBTN IJ; Sell; TP IDR1,100) Company Update: A Silver Lining On The Horizon?

An acquisition by Bank Mandiri will be a silver lining for Bank Tabungan Negara, which continues to struggle with various issues. The proposed acquisition will make the former the largest mortgage lender but may drag its ROAE. If the deal materialises, the multiple may not be much higher than the current one and, after a 62% share price gain YTD, we believe the risk-reward ratio does not justify further buying. Maintain SELL.

¨       Bank Mandiri to acquire Bank Tabungan Negara? It has been reported that the State-Owned Enterprises (SOE) Ministry has proposed that a principal approval for changes in Bank Tabungan Negara’s shareholders be included as one of the considerations in the bank’s upcoming shareholders’ meeting. Bank Mandiri is reported to be acquiring the Government’s 60% stake in Bank Tabungan Negara.

¨       Acquisition a silver lining. We believe that an acquisition by a larger SOE bank will be a silver lining for Bank Tabungan Negara, which has been struggling with issues like rising non-performing loans (NPL), a failure to successfully expand into commercial segments, tight liquidity and net interest margin (NIM) contraction. The bank also suffers from a lack of resources. Should the deal materialises, stronger capital, cross-selling activities, expanded network and, more importantly, structural and cultural changes in the bank will be expected.

¨       A challenging pill to digest. The acquisition will turn Bank Mandiri into Indonesia’s largest mortgage lender, lifting its market share to ~34% from ~10% and will boost its assets by ~18%. Bank Tabungan Negara’s low-end housing business and dominant presence in subsidised housing have limited overlaps with Bank Mandiri’s mid-end mortgage market. However, Bank Tabungan Negara’s ROAE of 13.6% for 2014F is far inferior to Bank Mandiri’s 20.9%, while latter will inherit the structural challenge in the housing subsidy scheme currently faced by the former.

¨       Maintain SELL after 62% share price gain YTD. Given the nature of the transaction and Bank Tabungan Negara’s inferior ROAE, the deal multiple may not to be much higher than the current valuation. Although the deal could fulfil the regulator’s hope of industry consolidation, the conclusion of the deal remains to be seen given the changing political landscape.

Best regards,

RHB OSK Indonesia Research Institute