BBNI - Improving Asset Quality

BBNI’s 3Q22 earnings grew +1.0% qoq and jumped 79.8% yoy to IDR4.89 tn, while 9M22 figure surged 76.8% yoy, exceeding our and market expectations (82.3%/84.4%). NIM and asset quality saw a consistent improvement in fourth straight quarters. We adjust CoF and loan growth assumptions to accommodate the potential impact of 7DRRR hikes on banks’ NIM next year. On the flip side, we expect asset quality should remain manageable and hence BBNI could see further CoC improvement in 2023. Maintain BUY, with target price of Rp10,600 (1.4x 2022F P/B) while it is currently trading at 1.3x 2022F P/B, or below its +1SD10-year historical mean at 1.5x. BBNI’s 3Q22 and 9M22 NPAT beat KBVS’ and market forecasts. Bank Negara Indonesia’s (BBNI) 3Q22 net profit grew 1.0% qoq and 79.8% yoy to IDR4.89 tn, mainly driven by a sharp drop in provisions (-9.9% qoq/-37.1% yoy). 3Q22 NPAT contribution to FY figures exceeded KBVS and consensus expectations of 29.4% and 30.2%. On a cumulative basis, 9M22 earnings surged by 76.8% yoy to IDR13.69 tn, which is above KBVS and consensus forecasts at 82.3% and 84.4%, respectively. 3Q22 loan growth arrives within KBVS and BBNI’s FY22F BBNI 3Q22 loan grew was rather flattish qoq but grew 6.9% ytd to IDR622.6 tn. On annualized basis, loan grew 9.1% yoy and arrives within our 2022F forecast (9.0% yoy) and management’s guidance of 7%-10%. The flattish 3Q22 loan growth of 0.4% qoq (vs. 2Q22: 4.9% qoq) was triggered by corporate SOE loan which declined by -7.9% qoq. However, we are still sanguine as overall loan growth achievement on yoy basis is still showing an improvement (3Q22 loan growth 20bp higher at 9.1% yoy vs. 8.9% yoy in 2Q22) while the decline in corporate SOE loan was largely being offset by stronger growth from lower risk segments (3Q22 corporate private loan at 20.4%yoy vs 14.7%yoy in 2Q22). Consistent performance across major asset quality metrics BBNI reported another better asset quality progress, with CoC improving 130bp to 2.0% in 9M22 and to 1.6% in 3Q22 (vs 1.9% in 2Q22). These figures arrive within management guidance of 1.9%-2.1% and better compared to our 2022F CoC for BBNI at 2.1%. COVID-19 restructured loans recorded another improving figure which declined to 9.6% of total loans compared to 10.2% and 11.8% in 2Q22 and 1Q22. Gross NPL ratio also showed an improvement to 3.0% in 3Q22 vs 3.2% in 2Q22 and 3.5% in 1Q22, with stronger NPL coverage by 760bp qoq to 270.8% vs 263.3% in 2Q22. Revising down 2023F NIM for BBNI but also lowering provision We revised down our 2023F NIM for BBNI by 20bp from 4.9% to 4.7%, as we expect CoF could elevated as a result of the end of low interest rate environment. We also adjust our 2023F loan growth assumption for BBNI by 4.1% to IDR689.5 tn from IDR718.7 tn previously, as we view the potential continuing uncertainty could lead as a headwind for loan demand in the banking industry. However, we expect asset quality to remain well managed and hence will potentially lower provisions. With this assumption, we expect BBNI could witness lower CoC in 2023 In line with the bank’s expectation that CoC to drop 40bps to 1.5% vs 1.9% in 2022F. Maintain BUY with target price of Rp10,600 Our target price is based on Gordon Growth Model-derived fair P/B of 1.4x (normalised ROE: 13.7%, cost of equity: 10.8%, long-term growth: 4.1%). BBNI is currently trading at 1.3x 2022F P/B, or below its +1SD of 10-year historical mean at 1.5x. Risks to our call are: a) lower-than-expected loan growth, NIM and loan yield, b) higher than expected credit cost and c) higher inflation, slowing economic activity and d) deteriorating asset quality.