Bank BJB (BJBR IJ; Buy; TP IDR1,300) Results Review: Earnings Dive As NIM Contracts

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Bank BJB (BJBR IJ; Buy; TP IDR1,300) Results Review: Earnings Dive As NIM Contracts

Bank BJB’s 1Q14 results were poor, in our view. The focus was on decreasing asset quality as NPL ratios hit a new high for micro, commercial and mortgage loans. Management is overhauling lending model and reducing risk appetite. NIM decreased sequentially as asset yields contracted and CoF rose sharply. However, cost management and impairment reversals provided some cushion to the weak earnings.

¨       Earnings weak on NIM contraction. Bank BJB’s 1Q14 net profit of IDR325bn (17% q-o-q, -12% y-o-y) represents 23% of our and consensus’ full year estimates. Net interest income dropped by 11% q-o-q (-6% y-o-y) and while its net interest margin (NIM) took a 94bps q-o-q dive to 6.7%, as cost of funds (CoF) spiked 70bps q-o-q while asset yields contracted 34bps q-o-q. An impairment reversal of IDR264bn offset the sharp rise in credit costs (IDR367bn or an annualised 300bps over gross loans) while costs were managed (-14% q-o-q, -2% y-o-y).

¨       The spotlight is still on falling asset quality. Credit growth moderated sharply to 20% y-o-y (4Q13: 28% y-o-y) as micro, commercial and mortgage loans growth slowed significantly on rising non-performing loans (NPL). Gross NPL ratios soared to a new high of 3.8% (4Q13: 2.8%) as micro, commercial and mortgage NPL ratios jumped to 16.4%, 11.1% and 4.1% respectively. Special mention loans growth of 16% y-o-y suggest that the buildup in NPL has yet to ease. Changes to the loan approval model in its micro segment are underway, while the bank is reducing its risk appetite by focusing on large corporations and decreasing exposure to commercial loans of IDR5bn-100bn where risks are higher. We expect to see NPL peaking before 4Q14.

¨       Volatile deposit growth on TD flows. Customer deposits jumped 22% q-o-q or 26% y-o-y as time deposits (TD) surged by 64% q-o-q (38% y-o-y). The sharp inflow of TD was above the bank’s expectations and management intends to reduce its maximum TD rate to around 10% in 2Q14 from 11.5%. Its current and savings (CASA) mix fell to 42% and its loan-to-deposit ratio (LDR) eased to 80%.

Best regards,

RHB OSK Indonesia Research Institute

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