BBRI - Solid micro segment for sustainable growth

• BBRI’s 1Q22 net profit rose 78.2% YoY to Rp12.17tn, representing 33.4% of our FY estimate 

• We expect loans to grow 9% YoY in 2022, driven by micro and ultra micro. Furthermore, we anticipate NIM to be at 7.8% as BBRI will focus on high yield assets growth, improving CoF efficiency, and leveraging Pegadaian‐PNM synergy. We also estimate credit cost to hover around 3.0% and NPL to stand at 3.0% with LAR coverage exceeding 40% 

• Reiterate BUY with 11.3% 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 4) manageable asset quality with high coverage ratio 

Exceeding expectations BBRI’s net profit surged 78.2% YoY to Rp12.17tn in 1Q22, accounting for 33.4%/29.3% of our/consensus FY forecasts. Net interest income grew 12.1% YoY to Rp30.41tn in 1Q22 as interest income increased 5.9% YoY to Rp36.73tn, while interest expenses were down 16.4% YoY to Rp6.32tn. NIM improved from 7.33% in 1Q21 to 7.72% in 1Q22, driven by lower CoF by 43bps YoY to 1.97%. Furthermore, fees and commissions went up 12.1% YoY to Rp4.56tn in 1Q22, particularly sourced from e‐channel, insurance, and loan admin fees. Recovery income escalated 31.0% YoY to Rp2.36tn in 1Q22. However, gain from sales of securities declined 57.9% YoY to Rp456bn in 1Q22. Moreover, opex rose slightly by 3.8% YoY to Rp18.37tn in 1Q22 with cost to income ratio (CIR) down to 44.6% from 46.6% in 1Q21. In addition, provision shrunk 26.6% YoY to Rp7.47tn in 1Q22 amid economic recovery, while NPL coverage ratio expanding from 231.2% in 1Q21 to 276.0% in 1Q22. Strong loan growth coupled with higher LAR coverage BBRI’s loans and financing grew 7.4% YoY to Rp1,075.9tn in 1Q22 as micro segment escalated 15.4% YoY to Rp415.4tn, contributing 42.6% of total portfolio from 40.2% in 1Q21. Furthermore, NPL went up slightly from 3.12% in 1Q21 to 3.15% in 1Q22, mainly came from micro, small and consumer segments. Restructured loans to total portfolio declined from 26.3% in 1Q21 to 19.8% in 1Q22. Loan at risk (LAR) was also down from 28.8% in 1Q21 to 22.6% in 1Q22 with coverage increasing from 27.6% in 1Q21 to 38.5% in 1Q22 as the bank built up adequate provision to mitigate pandemic impacts. Meanwhile, liquidity remained ample with stable LDR YoY at 87.0% in 1Q22. Moreover, CASA ratio expanded from 58.9% in 1Q21 to 63.6% in 1Q22, driven by higher demand deposits and lower time deposits. Post right issue, capital was robust with CAR rose from 18.9% in 1Q21 to 24.6% in 1Q22 to support sustainable growth. Focus on high yield assets and CoF improvement We maintain our BBRI’s loan growth assumption of 9% YoY in 2022, mainly supported by micro and ultra micro ecosystem. Following economic recovery, the bank has implemented strategies to boost Kupedes, namely business process reengineering, product innovation, new business model, and new rules of KUR disbursement. The growth will also be driven by 1) KUR allocation of Rp260tn with subsidized fixed rate; 2) ample liquidity with comfortable LDR level at c.90%; 3) robust capital; and 4) improving LAR with sufficient coverage. Furthermore, we expect NIM to be at 7.8% this year as BBRI will remain focus on high yield assets growth and quality, improving CoF efficiency by expanding CASA ratio, and leveraging synergy with higher margin Pegadaian and PNM. Moreover, we estimate cost of credit to be manageable at 3.0% and opex to increase 7% YoY in 2022. In addition, we anticipate that NPL will hover around 3.0% with LAR coverage exceeding 40% by year‐end. Reiterate BUY on the back of solid micro segment and digitalization We maintain our BUY call with a higher GGM‐based price target of Rp5,400 per share, assuming ROE of 13.2% and cost of equity of 11.1%. Note that at our price target, the stock would trade at a 2022F PER of 18.6x 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 synergy, coupled with BRILink and BRIMo development; 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 loan demands; as well as 5) manageable asset quality with high coverage ratio.