BBRI - Banking on sustainable micro growth

• BBRI’s 1H22 net profit rose 98.7% YoY to Rp24.79tn, representing 56.3% of our FY forecast 

• We expect loans to grow 9% YoY in 2022. BBRI focuses on funding sustainability, asset quality, selective growth, and optimizing ultra‐micro ecosystem. The bank has secured KUR allocation of Rp330tn in 2023. We also anticipate that NIM will be at c.8%, credit cost to hover around 3.0%, and NPL will stand at 3.0% by year‐end 

• Reiterate BUY with 23.9% upside potential on a 12‐month view, backed by 1) robust micro loan growth amid economic recovery, higher KUR allocation, ultra‐micro synergy; 2) NIM improvement; 3) increasing fee based income and CASA following digitalization; 4) solid liquidity and capital; as well as 5) manageable asset quality with high coverage ratio 

Above expectations BBRI’s net profit jumped 98.7% YoY to Rp24.79tn in 1H22, accounting for 56.3%/56.1% of our/consensus FY estimates. Net interest income increased 17.6% YoY to Rp64.61tn in 1H22 as interest income grew 9.9% YoY to Rp76.86tn and interest expenses were down 18.3% YoY to Rp12.25tn. NIM improved from 7.41% in 1H21 to 8.24% in 1H22, driven by lower CoF by 47bps YoY to 1.91%. Furthermore, fees and commissions rose 7.8% YoY to Rp9.37tn in 1H22, particularly sourced from e‐channel, insurance, and deposit admin fees. Recovery income escalated 19.2% YoY to Rp5.08tn in 1H22. Nevertheless, gain from sales of securities declined 53.3% YoY to Rp895bn in 1H22. Moreover, opex increased 7.9% YoY to Rp38.23tn in 1H22 with CIR went down to 44.3% from 40.7% in 1H21. In addition, provision decreased 24.2% YoY to Rp16.93tn in 1H22 amid economic recovery, while NPL coverage ratio expanding from 258.4% in 1H21 to 265.2% in 1H22. Strong loan growth with improving LAR BBRI’s loans and financing grew 8.7% YoY to Rp1,104.8tn in 1H22, driven by micro segment that rose 16.0% YoY to Rp425.3tn with contribution to total portfolio increased from 40.2% in 1H21 to 42.4% in 1H22. Furthermore, NPL was up slightly from 3.27% in 1H21 to 3.32% in 1H22, mainly came from medium, micro, and small. Restructured loans to total portfolio declined from 24.5% in 1H21 to 17.8% in 1H22. Loan at risk (LAR) also decreased from 27.3% in 1H21 to 20.8% in 1H22 with coverage expanding from 31.0% in 1H21 to 42.4% in 1H22 as the bank has built sufficient provision amid pandemic impacts. Meanwhile, we deem liquidity remained ample despite higher LDR from 84.6% in 1H21 to 88.5% in 1H22. Moreover, CASA ratio rose from 59.6% in 1H21 to 65.1% in 1H22, driven by growing demand deposits and lower time deposits. Capital was robust with CAR increased from 19.1% in 1H21 to 25.1% in 1H22 to support sustainable growth. Maintaining solid fundamental metrics We maintain our BBRI’s loan growth assumption of 9% YoY in 2022, supported by strong micro and ultra‐micro ecosystem. In response to macro dynamics, management focuses on 1) funding sustainability by increasing CASA and managing liquidity; 2) asset quality; 3) selective growth; and 4) ultra‐micro ecosystem optimization as the new source of growth. We believe that KUR disbursement will continuously grow as government plans to raise its allocation from Rp260tn in 2022 to Rp330tn in 2023. Furthermore, we expect NIM to be at c.8% this year as BBRI remains focus on higher yield assets, loan quality, and CoF improvement by enlarging CASA ratio. This will also be supported by interest income adjustment from loan restructuring of SOE transportation and interest rate hikes. Moreover, we estimate credit cost to be manageable at c.3.0% in 2022 following frontloading provision in 1H22. In addition, we anticipate that loan quality will continue to improve with NPL to hover around 3.0% by year‐end. Reiterate BUY on the back of solid micro segment and digitalization We maintain our BUY call with a GGM‐based price target of Rp5,400 per share, assuming ROE of 13.3% and cost of equity of 11.2%. Note that at our price target, the stock would trade at a 2022F PER of 18.2x and PBV of 2.7x. We remain sanguine on BBRI’s outlook, driven by 1) robust micro loan growth following economic recovery, higher KUR allocation, ultra‐micro ecosystem synergies, coupled with BRILink and BRIMo developments; 2) NIM improvement; 3) increasing fee based income, efficiency, and CASA by focusing on digital and culture transformation, which we believe to be a cushion against economic downturn; 4) solid liquidity and capital to cater growing loans; as well as 5) manageable asset quality with high coverage ratio.