BBTN - Proxy of promising mortgage market

Captive market for sustainable long term growth outlook with undemanding valuation are the two main catalysts that too good to be ignored. Post right issue, the bank will have stronger capital and this mean a better capacity to capture potential robust mortgage demand going forward. Maintain BUY, with higher target price of IDR1,770 (0.7x ‘23F P/B) while it is currently trading at 0.5x ‘23F P/B, or slightly above its -2SD of 10-year historical mean. Moderating earnings growth, yet still at high single digit BBTN’s earnings growth momentum is expected to moderate at 9.5% yoy in ‘23F as a result of high base effect and strong recovery momentum growth (‘21 at 48.3% yoy and ‘22F at 20.8% yoy). Next year earnings growth will be supported by the interest income improvement at 10.3% yoy and with the help from non-interest income growth of 9.1% yoy as well as a softer increase in provisions expenses. Our interest income forecast for BBTN in 2023 is derived by the assumption of 7.3% yoy loan growth, blended loan yield of 8.8% and average earnings asset yield of 7.6%. Robust FLPP channeling should continue As per 24 Dec ‘22, Housing Financing Liquidity Facility (FLPP) channeling has reached 226.000 units (IDR25.2 tn), or 13% surpassing 2022 guidance of 200.000 units (IDR19.1 tn). The government is targeting FLPP to reach 220.000 units (IDR25.2 tn) in 2023 with additional units coming from Tapera program of 10.000 units (IDR1.1 tn). Historically, BBTN absorbs more than 70% of the industry’s FLPP channeled (2 years average at 75%). That said, assuming a conservative 50% share in 2023 FLPP, BBTN will channel at least 110.000 units of FLPP which translated into an interest income of IDR29.8 tn (loan yield at 8.8% with average selling price of IDR145.5mn/unit). Expecting softer loan growth, and slight NIM contraction BBTN expect loan growth to arrive in mid teen level in 2023, while we are using a more conservative approach of 7.1% yoy as we accommodate the macro uncertainty next year. Of the total, we forecast housing and non-housing growth at 6.9% yoy and 8.6% yoy, respectively. Subsidized mortgage will remain the largest portion at 55.7% of the total housing loan in 2023 or equal to around 8.6% yoy growth and higher than non-subsidized housing loan growth of only 6.7% yoy. Adjusting to the macro background, NIM is expected to slightly contract to 3.63%, down from our previous NIM assumption of 3.96%. 11M22 earnings grew by 41.5% yoy BBTN’s bank only net profit grew strongly at 41.5% yoy in 11M22, helped by solid net interest income and PPOP growths of 28.8% and 36.1% yoy, respectively. In Nov ‘22 stand alone, it grew even stronger at 42.4% MoM, thanks to lower provision expenses of around 16.3% mom. In the same period, total loan grew 8.1% yoy, backed by 7.5% yoy of loan channeled and 13.4% yoy growth in sharia financing. Stronger capital, bigger loan capacity Post right issue, BBTN will have stronger capital base and will provide more upside room and bigger capacity for loan growth acceleration. Assuming all fund raised from rights issue at IDR4.13 tn, CAR is expected to reach 19.1%, in-line with the management’s guidance of 19%-20% post rights issue. We also expect Tier-1 to improve to 14.5% in 2022 (9M22: 13.1%) and 15.1% in 2023, respectively. Maintain BUY with higher target price of IDR1,770 Our target price is based on Gordon Growth Model-derived fair P/B of 0.7x. BBTN is currently trading at 0.5x ‘23F P/B, or slightly above its -2SD of 10-year historical mean at 0.4x. 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.