26 November 2012

INDONESIA EQUITY
Investment Research

Company Update
Rocky Indrawan
+65 6232 3832
rocky.indrawan@sg.oskgroup.com Bank Rakyat Indonesia
Favourable Risk-Reward Balance
BUY Short-term dampener. The feeble tone in BBRIs 3Q12 has caused weakness in share
Target IDR8800 price and we sensed that investors confidence was knocked by concerns of falling asset
yields and sluggish micro credit growth. Although we concur that contraction in NIM was
Previous IDR8800 a dampener, not all are doom and gloom: 1) segmental analysis suggests that interest
Price IDR7100 income growth was mostly dragged down by lower securities yields (-7% fall in interest
income YoY) and retail (-2% YoY) while interest income growth from micro although
BANKS
not exciting grew by 2% YoY; 2) on a net interest income basis, micro segment grew
Bank Rakyat Indonesia is Indonesias first
6% YoY; 3) we expect micro credit growth to pick up in 2013; 4) valuation is compelling.
state-owned bank and is among the
oldest in the country. Since its origination Stock may be muted in the near-term however it is attractive on a 12-month basis.
the bank has focused on micro, small and Maintain Buy.
medium enterprise segment.
Not all on micro weakness. Asset yields fell ~210bp YoY to offset ~70bp drop in
Stock Statistics average cost of funds and NIMs contracted to 8.8% in 9M12. Although mediocre micro
Bloomberg Ticker BBRI IJ credit growth (12.1% YTD) took some blame, one should note that higher corporate
Share Capital (m) 24,669 loans mix (25% of loans in the last 2 Qs), FX lending (over 40% growth YoY), lower
Market Cap (IDRb) 176,385 returns from securities and the impact of new accounting recognition on interest income
52 week H | L Price 7,850 | 5,150 were jointly margin negative. Micro contribution remains healthy at ~30% of loan book.
(IDR)
3mth Avg Vol (000) 27,768
YTD Returns (%) 5.9 Capacity to translate to intensity. BBRI is adding 7,000 new loan officers this year,
Beta (x) 1.26 another 2,000 next year to expand micro lending capacity. Given the required training
time, the newly recruited officers are likely to hit the ground by 4Q12-early 2013. Our
Major Shareholders (%) conversation with BBRI also suggested that micro credit growth could pick up in 4Q12
Indonesian Government 56.8 although in our view it may still be below 20% YoY.

Favourable risk-reward balance. Stock is now trading at 2013F 9.7x PE/ 2.2x PB
which is undemanding in our view at the same P/B multiple as BMRI but BBRI has
Share Performance (%)
higher ROAE. Though unlikely, worst case scenario could mimic performance post 1Q12
Month Absolute Relative
1m (7.1) (6.6) results which bear resemblance to 3Q12 results where BBRI dipped to 1.9x PB
3m 0.0 (3.8) before rallying 36%.
6m 20.2 12.8
12m 6.7 (8.9)

6-month Share Price Performance

IDR
9,000
7,000
5,000

FYE 31 Dec (IDRb) FY10 FY11 FY12F FY13F FY14F

Net interest income 32,889 34,427 35,356 39,188 45,286
Pre-provision profit 22,319 23,117 23,846 26,859 32,107
Net profit 11,472 15,083 16,869 18,010 21,066
% chg YoY 57.0 31.5 11.8 6.8 17.0
Consensus - - 16,860 18,926 21,877
EPS (IDR) 933.6 615.8 688.7 735.3 860.0
DPS (IDR) 186.0 122.3 136.8 146.0 170.8
Dividend Yield (%) 2.0 2.0 1.9 2.0 2.4
ROAE (%) 35.9 34.9 29.8 25.4 24.1
ROAA (%) 3.2 3.5 3.4 3.3 3.5
P/E (x) 9.9 9.9 10.4 9.7 8.3
P/B (x) 3.1 3.0 2.8 2.2 1.8
Source: Company data and DMG estimates

OSK Research | See important disclosures at the end of this report 1

 26 November 2012

BANK RAKYAT INDONESIA COMPANY UPDATE

Exhibit 1: Asset yields, cost of funds Exhibit 2: Loan mix

and NIM changes YoY
Corporate SME Consumer Micro
(%) 9M11 avg (LHS) 9M12 avg (LHS) (%) 100%

16 YoY change (RHS) 0.0 90%

31.8 32.4 31.7 31.8
14 80%
(0.5) 70%
12
60% 19.7 19.9 18.9 18.6
10 (1.0)
50%
8
(1.5) 40%
6 28.7 26.3 25.3 25.0
30%
4
(2.0) 20%
2
10% 19.8 21.4 24.1 24.6
0 (2.5)
Avg asset Cost of funds NIMs 0%
yields 4Q11 1Q12 2Q12 3Q12

Sources : Company data and DMG estimates Sources : Company data and DMG estimates

NIM contraction was the weakest point in 9M12 and BBRI posted the poorest performance in
NIM relative to peers. Asset yields drop of 210bp YoY to 12.1% more than offset the 74bp
improvement in cost of funds to 3.4%. NIMs fell to ~8.8% from ~10.2% in 9M11
(Exhibit 1).

Although mediocre micro credit growth of 12.1% YTD (15.1% YoY) deserves some blame,
closer look suggests that it is erroneous to blame the fall in asset yields solely on micro
loans alone. Corporate loans have now made up ~24-25% of loan book for the past 2 Qs,
higher than the desired 20%. We further note that FX loans which bear lower yields than
IDR loans continued to grow rather strongly at 44% YoY as of 9M12.

We gather that these loans are to corporate SOEs and these are short-term avenues the
management is pursuing as: 1) management saw IDR3.3t of high-yield Government bonds
matured in early 3Q12; 2) returns offered by placements and securities are low; 3)
consolidation in SME is still continuing and micro business is being revamped. We believe
that a return to 20%-max corporate loan mix to total loan book is key to regain
some footing on asset yields and also to recover confidence.

Segmental analysis suggests that softness in interest income did not come from micro alone.
Retail loans interest income (38% of interest income) dropped 2% YoY and interest income
from securities (12% of interest income) fell 7% YoY. On the other hand interest income from
micro (40%) managed to grow by 2% while corporate (8%) and syariah (3%) interest income
expanded 15% and 38% respectively (Exhibit 3).

Exhibit 3: BBRI 9M12 interest income growth by business segments

OSK Research | See important disclosures at the end of this report 2

 (IDRb) Interest income growth (RHS) Nominal interest income growth (LHS) (YoY %)
500 40
400
300 37.7 30
200
20
100
0
15.2 10
(100)
(200) 0
(7.0)
(300) 1.6
(400) (2.2) (10)
Micro loans Retail loans Corporate loans Syariah Securities
Source: Company data and DMG research estimates

On net interest income basis, management disclosure suggests that micro net interest income
grew 6% YoY while corporate net interest income grew 3% (Exhibit 4), implying that BBRI
has some pricing power in deposit in the micro segment, which we view positively.

Exhibit 4: BBRI 9M12 net interest income growth by business segments

(IDRb) Nominal net interest income (LHS) Net interest income growth (RHS) (YoY %)
600 6.1 8
6
400 3.2
4
200 2

0 0
(2)
(200) (4.9) (2.2) (4)
(400) (6)
Micro Retail Corporate Others
Source: Company data and DMG research estimates

We concur that micro credit has to pick up, although it is unlikely that growth could hit above
30% seen in glory days few years back on the back of rising competition. Our conversation
with BBRI suggested that net micro disbursement has reached IDR1.9t in the month of
October alone and if we assume that BBRI manage to do equally well in the month of
November and December, IDR5.7t disbursement in 4Q12 could translate to 18% YoY micro
credit growth.

The market has now turned highly sceptical and somewhat pessimistic after two out of three
quarters of disappointment and although we are not convinced that this would be large
enough impetus for the stock to thrust forward, the pick up in growth could provide some
source of confidence.

OSK Research | See important disclosures at the end of this report 3

 Exhibit 5: BBRI P/E band Exhibit 6: BBRI P/B band
(IDR) (IDR)
18.0x 3.7x
10,000 14.3x 10,000
9,000 9,000 3.0x
8,000 10.6x 8,000
7,000 7,000
2.3x
6,000 6,000
5,000 6.9x 5,000
1.6x
4,000 4,000
3,000 3,000
3.2x 0.9x
2,000 2,000
1,000 1,000
0 0
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012
Sources : Company data and DMG estimates Sources : Company data and DMG estimates

We view BBRIs current valuation as compelling at 2012F-2013F 10.3x-9.7x PE / 2.8x-2.3x PB

a similar PB multiple to BMRI but BBRI boasts higher ROAE profile. We adjust upward our
2012F earnings by 11% largely on reduction of provisioning needs after the trend seen in
9M12 where BBRI moved to probability estimates-based provisioning methord. We raised
FY13-14 earnings by 2%. Note that our 2013F earnings are 5% below consensus estimates.

Our TP of IDR8,800 is somewhat assuming stationary valuation in 12-month horizon of 2.8x

PB. Worst case scenario we believe would be a repeat of stock performance post 1Q12 results
which bear resemblance to 3Q12 where micro credit was slow and bottom line was boosted
by low impairment costs and non-operating income windfall. BBRI dipped to 1.9x forward PBV
before rallying 36%. 2013F 1.9x PB implies a price of IDR6,100.
 26 November 2012
FINANCIALS - BBRI
FYE Dec (IDR) FY10 FY11 FY12f FY13f FY14f
Profit & loss
Interest income 44,615 48,164 48,772 54,380 62,160
Interest expense (11,727) (13,737) (13,415) (15,192) (16,874)
Net interest income 32,889 34,427 35,356 39,188 45,286
Non-interest income 5,545 5,776 6,843 7,175 7,655
Operating income 38,433 40,203 42,199 46,363 52,941
Operating expenses (16,114) (17,086) (18,353) (19,505) (20,834)
Pre-provision profit 22,319 23,117 23,846 26,859 32,107
Provisions and allowances (7,917) (5,533) (3,594) (5,011) (6,302)
Operating profit 14,402 17,584 20,252 21,848 25,805
Non-operating income 506 1,172 842 674 539
Profit before tax 14,908 18,756 21,094 22,521 26,344
Tax (3,436) (3,668) (4,219) (4,504) (5,269)
Minority interests 0 (5) (6) (7) (9)
Net profit 11,472 15,083 16,869 18,010 21,066
EPS 933.6 615.8 688.7 735.3 860.0
Balance sheet
Short-term funds 118,896 122,696 124,255 122,972 123,077
Gross loans 252,489 294,515 341,680 403,939 476,245
Provisions (14,103) (16,090) (15,854) (18,375) (22,703)
Net loans 238,386 278,425 325,826 385,564 453,543
Government securities 30,718 36,702 32,020 32,020 32,020
Securities 5,423 6,212 6,212 6,212 6,212
Fixed assets 1,569 1,853 1,853 1,853 1,853
Other earning assets 2,118 16,087 16,087 16,087 16,087
Other non-earning assets 7,176 7,925 7,925 7,925 7,925
Total assets 404,286 469,899 514,178 572,632 640,716
Customer deposits 333,652 384,264 415,038 458,259 508,663
Bank deposits 5,160 4,024 4,024 4,024 4,024
Other liabilities 28,800 31,790 31,790 31,790 31,790
Total liabilities 367,613 420,079 450,853 494,074 544,478
Share capital 6,167 6,167 6,167 6,167 6,167
Reserves 30,506 43,607 57,103 72,325 89,992
Minority interests 0 46 55 66 79
Total equity 36,673 49,820 63,325 78,558 96,238
BVPS 2,973.2 2,017.7 2,564.7 3,181.8 3,898.0
Gross non performing loan 7,041 6,775 8,542 10,906 13,811
Risk-weighted assets (RWA) 230,447 279,603 309,292 358,598 409,812
Tier 1 capital 27,673 38,215 50,715 57,286 64,966
Total capital 31,711 41,816 54,455 61,339 69,316
Key ratios (%)
Yield on earning assets 13.72 12.45 11.29 11.29 11.48
Cost of funds 3.74 3.64 3.20 3.33 3.36
Net interest spread 9.98 8.80 8.09 7.96 8.12
Net interest margin 10.12 8.90 8.19 8.14 8.36

Net interest income growth 50.0 4.7 2.7 10.8 15.6

Non interest income growth 26.1 4.2 18.5 4.9 6.7
Pre-provision profit growth 55.4 3.6 3.2 12.6 19.5
Operating profit growth 68.2 22.1 15.2 7.9 18.1
Net profit growth 57.0 31.5 11.8 6.8 17.0

Non-interest income / op 14.4 14.4 16.2 15.5 14.5

Cost / average assets 4.47 3.91 3.73 3.59 3.43
Cost / income 41.9 42.5 43.5 42.1 39.4
ROAE 35.89 34.89 29.85 25.41 24.12
ROAA 3.18 3.45 3.43 3.31 3.47

Gross loan growth 21.3 16.6 16.0 18.2 17.9

Customer deposit growth 30.4 15.2 8.0 10.4 11.0
Loan-to-deposit 75.7 76.6 82.3 88.1 93.6
CASA 60.9 60.1 60.8 61.7 62.7
RWA growth 33.2 21.3 10.6 15.9 14.3

Gross NPL growth (2.6) (3.8) 26.1 27.7 26.6

Gross NPL ratio 2.79 2.31 2.50 2.70 2.90
Provision charges 2.44 1.43 0.83 1.04 1.16
Provisions / gross NPL 198.7 235.4 184.0 167.0 163.0
Provisions / net loans 5.9 5.7 4.8 4.7 5.0

Tier-1 12.0 13.7 16.4 16.0 15.9

Total CAR 13.8 15.0 17.6 17.1 16.9

OSK Research | See important disclosures at the end of this report 5

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed
will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or
financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment
decision-making based on this report. The company, its directors, officers, employees and/or connected persons m ay periodically hold an interest
and/or underwriting commitments in the securities mentioned.

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