Indonesian Banks: 3Q12 Results Review

14 November 2012
INDONESIA EQUITY
Investment Research
3Q12 Results Review

Rocky Indrawan
+65 6232 3832
rocky.indrawan@sg.oskgroup.com Indonesian Banks
Low Cost of Funds Continued
NEUTRAL By large an encouraging 3Q12. Banks reported 3Q12 earnings that broadly
met expectations. Operating revenues were mostly supported by strength in
NIMs similar to trend seen in 2Q12 while non-interest income growth was
largely steady. Costs were clearly on the rise as banks compete and expand
with the top four banks posting higher cost-to-income ratios YTD however credit
costs stayed mild to further support net profitability.
NIM strength was sustained. On QoQ basis, most banks NIMs were propped
up by soft cost of funds which offset the generally flattish asset yields. The pace
of credit growth in 3Q12 slowed down from 2Q12 on consumer credit and FX
credit slowdown. NIM improvement was seen most excitingly in BMRI, followed
by BBTN and BDMN while BBRI dished a disappointment as its NIM saw
contraction. Despite the heartening trend, cost of funds may be near its best in
our view and it may rise in 2013 as LDR rises and inflation risk is higher.
Costs on the rise, impairment on the low. Operating expenses were up to

30% higher this year compared to last year as banks compete and expand. The
top four banks posted YTD CIR that are 2-400bp higher YoY and indications
from management have so far suggested that investments will continue to be
made in 2013 with BBCA being the most aggressive and BBNI and BBRI the
least, in our view. Net credit costs were relatively benign in 3Q12 as asset
quality held steady and reversal of provisions enjoyed by selected banks.
Maintain Neutral on sector. We rate BBRIs 3Q12 to be the weakest as it was

driven by low credit costs and non-core other income while its micro credit
growth remained subdued and NIM contracted. This is likely to lead to
underperformance. BMRIs result was most exciting as its NIM rose and CASA
inched up to record high while we also view BBCAs 3Q12 positively despite the
rise in credit costs. We are cautious on BJBR and BBNIs 3Q12 as their fast-
growing mortgage NPLs saw spikes whereas much positive can be drawn from
BBTNs results.
Recommendation summary
Bank Ticker Price TP Rating Upside P/E (x) EPS CAGR P/BV (x) ROE (%)
(IDR) (IDR) (%) 2012f 2013f 2010-2013f 2012f 2013f 2012f 2013f
Bank Rakyat Indonesia BBRI 7,250 8,800 BUY 21.4 10.8 10.0 15.6 2.8 2.3 29.1 25.2
Bank Negara Indonesia BBNI 3,775 4,700 BUY 24.5 11.2 9.5 14.4 1.6 1.4 15.6 16.2
Bank Central Asia BBCA 8,550 9,100 BUY 6.4 19.1 16.0 15.3 4.2 3.5 23.7 23.6
Bank Bukopin BBKP 640 900 BUY 40.6 6.2 5.5 13.2 1.0 0.9 17.3 17.4
Bank BJB BJBR 1,120 1,300 BUY 16.1 9.6 8.2 8.9 1.8 1.6 20.1 21.1
Bank Mandiri BMRI 8,600 8,700 NEUTRAL 1.2 14.1 12.1 17.6 2.7 2.3 21.0 20.7
Bank Danamon BDMN 6,250 7,000 NEUTRAL 12.0 15.7 13.8 10.0 2.1 1.9 14.5 15.0
Bank Tabungan Negara BBTN 1,610 1,450 NEUTRAL (9.9) 10.7 9.1 19.2 1.7 1.5 16.9 17.4
Prices as of 9 November 2012. Source: Company data and DMG estimates
OSK Research | See important disclosures at the end of this report 1

INDONESIAN BANKS 3Q12 REVIEW
Low cost of funds sustained NIM in 3Q12
With the exception of BBRI, net interest income of most banks grew in robust fashion in 3Q12.
On QoQ basis, excluding BBRI and BNGA, net interest income grew 2-9% while on YoY basis,
net interest income soared between 15-37% (Exhibit 1). This took 9M12 net interest income
growth to 15-33% YoY (Exhibit 2), with the exception of BBRI which booked a lacklustre 2% YoY
growth.
Exhibit 1: 3Q12 net interest income growth trend

(%) QoQ YoY
40
35
30
25
20
15
10
5
0
(5)
BBCA BBRI BDMN BMRI BBTN BJBR BBKP BBNI BNGA BNII BNLI
Source: Company data and DMG research estimates
Exhibit 2: 9M12 net interest income growth YoY

(YoY %)
35 33
31
30 27 28
24 25
25
20 19
20
15 15
15
10
5 2
0
The trend was somewhat similar to 2Q12 where sequential NIM strength was propped up largely
by reduction in cost of funds. In 3Q12 we estimate that most banks cost of funds continued to be
soft on QoQ basis whereas on YoY, 3Q12 cost of funds were on average ~110bp lower than
3Q11 level (Exhibit 3). This brought 9M12 cost of funds ~40-150bp lower than that in 9M11
(Exhibit 4).
OSK Research | See important disclosures at the end of this report 2

14 November 2012
Notable highlights on cost of funds:
1) BBCA continued to lead peers on this front, with the lowest average cost of funds of
~2.3% in 9M12. BBCA pursued a strategy that could not be rivalled by reducing its FD
rates aggressively to maximum of 3.5% by the end of 3Q12 to uplift its CASA ratio to
record high of 79.5%.
2) The rest of the banks have also been slashing deposit rates, however to a lower extent.
We estimate that BBCAs cost of funds is about 70bp and 100bp lower than its closest
rivals BBNI and BMRI respectively.
3) The one bank making the least improvement was BBKP, whose management admitted
difficulties in competing with larger banks on rates and marketing. We view that its high
CIR of 60% also makes it difficult to invest aggressively in franchise and promotional
efforts.
Exhibit 3: 3Q12 cost of funds trend on QoQ and YoY basis, annualised
(annualised, %)
3Q12-2Q12 3Q12-3Q11
0.50
0.00
(0.50)
(1.00)
(1.50)
(2.00)
(2.50)
Exhibit 4: 9M12 cost of funds versus 9M11

(YoY bp)
0
(20)
(40)
(60)
(80)
(100)
(120)
(140)
(160)
Credit growth slowed down slightly from the pace seen in 2Q12 (Exhibit 6).
Notable highlights on credit growth in 3Q12:
1) The slowdown was largely attributed to some softness in consumer credit growth on the
back of higher down payment regulations. However we also note that some working
capital and FX loans (mostly USD) showed further signs of slowing down in 3Q12 as
banks turned more cautious on mining-related and export-oriented sectors.
2) BBRIs credit growth was most disappointing as its 3Q12 micro credit growth of 4%
QoQ; 15% YoY was not an improvement from 2Q12. BBRI has been expanding network
and increasing capacity by hiring more loan officers however given the needed training,
faster growth could be only expected in 4Q12 and 2013.
3) The sharp drop in BBKPs loan growth was attributed to Bulog loans repayment whereas
the continued slowdown in BDMN was due to both Adira and its micro lending
slowdown.
4) BBTNs growth was most aggressive as it expands outside of housing. Management

expects 2012 credit growth to be higher than 2011 and expects 26-27% growth next
year which is again the most aggressive guidance we have heard so far.
Exhibit 5: YoY credit growth trend YTD

(YoY %)
1Q12 2Q12 3Q12
50
45
40
35
30
25
20
15
10
Slower credit growths, competitive pressure on lending rates and lower returns from Government
securities have led asset yields lower on YoY basis (Exhibit 6).
Notable highlights on asset yields in 3Q12:
1) BBRI made the worst showing as asset yields plunged to ~11.7%, taking 9M12 asset
yields ~210bp lower YoY on the back of slow micro credit growth, higher than desired
contribution of corporate credit to loan book (~25% over the last two quarters) as well as
reduced contribution from high-yielding fixed-rate Government bond that matured in
3Q12.
2) We would rate BMRI to be the best on this front in 3Q12 as it could contain the reduction
in asset yields to only 27bp YoY while managing to perk it up on QoQ basis. This was on
the back of changing loan mix by segments (moving towards higher-yielding micro, SME
and consumer) and currency (low-yielding USD loan did not grow on QoQ basis in
3Q12).
3) Despite strong credit growth, BBCAs asset yields were flattish QoQ, lower YoY as
returns from securities and placements are lower YoY.
14 November 2012
Exhibit 6: 3Q12 average asset yields trend on QoQ and YoY basis, annualised
(annualised, %)
3Q12-2Q12 3Q12-3Q11
0.5
0.0
(0.5)
(1.0)
(1.5)
(2.0)
(2.5)
(3.0)
(3.5)
Exhibit 7: YoY change in 9M12 average asset yields versus cost of funds
(YoY bp)
Asset yields change Cost of funds change
0
(50)
(100)
(150)
(200)
(250)
Banks which manage to slash their cost of funds substantial enough to offset the fall in average
asset yields posted expanding NIMs and this is seen in BMRI, BDMN, BBTN, CIMB Niaga and
Maybank-BII. NIMs contracted on YoY basis this year for BBCA, BBRI, BJBR, BBKP while in
BBNI it has been pretty much unchanged (Exhibit 9).
Exhibit 8: 3Q12 average NIM trend on QoQ and YoY basis, annualised
(annualised, %)
3Q12-2Q12 3Q12-3Q11
1.00
0.50
0.00
(0.50)
(1.00)
(1.50)
(2.00)
(2.50)
Notable highlights in NIMs:
1) NIM progress has been most exciting in BMRI as not only the banks manage to reduce
its cost of funds by lower rates and raising CASA mix to record high of 63%, the Bank
has also been changing loan mix to higher-yielding segments such as consumer and
micro.
2) Despite BBCAs ability to raise NIM on QoQ basis, NIM remained lower on YoY basis as
returns from Government securities and placements are much lower.
3) Banks with high-FDs (BDMN: 56%; BBTN: 58%; CIMB Niaga: 58%; Maybank-BII: 63%)
are reaping the benefits of lower rates.
4) NIM was most disappointing in BBRI as asset yields fell more than cost of funds.
Exhibit 9: 9M12 NIM change YoY

(YoY bp)
100
50
(50)
(100)
(150)
Steady growth in non-interest income
Exhibit 10 and 11 show 9M12 core fee income and total non-interest income growth trends,
which are largely positive. The large banks are posting healthy growth in core fee income as
admin fees have been growing handsomely in line with growth in loans, deposits and
transactions. Only Maybank-BII saw negative growth YoY on the back of lower consumer
financing receivables and loan admin fees.
Exhibit 10: 9M12 core fee income growth

(YoY %)
25
20
15
10
5
0
(5)
(10)
(15)
14 November 2012
Total non-interest income (Exhibit 11) are more volatile than core fee income trend however
most banks post positive growth on YoY basis.
Notable highlights in non-interest income in 3Q12
1) BBRIs 9M12 growth of ~50% was inflated by chunky insurance claims and sale of fixed
assets in 3Q12 amounting to over IDR480b excluding it would normalise the growth to
~28%.
2) BMRIs 9M12 growth of 5% was suppressed by IDR1.4t proceeds of Garuda IPO in

1Q11 and higher insurance income in 9M11. Excluding Garuda proceeds, total non-
interest would have grown by ~22%.
3) BBNIs flat total non-interest income was on lower forex gain and other income mostly
asset recoveries.
Exhibit 11: 9M12 non interest income growth

(YoY %)
60
50
40
30
20
10
0
(10)
Note: non-interest income numbers above include fees and commissions, trading gains/losses, forex gains/losses,
miscellaneous non-interest income, insurance income (if available) and recoveries
Exhibit 12: Total non-interest income over total operating revenue

(%)
9M11 9M12
45
40
35
30
25
20
15
10
5
0

Rising costs on expansion and competition
Although the trend in costs was somewhat mixed on QoQ basis, operating costs in 3Q12 was
clearly much higher than 3Q11 (Exhibit 13). Network expansion and rising competition have
driven expenses this year and we have seen the large banks thrusting forward with their
investments:
1) BBRI has opened 35 new branches this year (more than 21 branches it added as of
Sep-11), 76 Units and 486 Teras along with its plan to recruit up to 7,000 loan officers
this year (we estimate that over 4,090 have been done by 3Q12).
2) BBNI has added 1,278 ATMs (more than 1,223 it added throughout the entire 2011) and
186 new branches YTD.
3) BMRI added 196 new branches (more than 167 it added throughout the entire 2011) and
1,470 new ATMs YTD.
4) BBCA has added 22 new branches and 1,909 new ATMs YTD (more than 1,119 ATMs it
added throughout the entire 2011) to beat BMRI in terms of ATM tally by 3Q12.
5) BNGA has added 67 new branches and 362 new ATMs YTD.
Exhibit 13: 3Q12 operating expenses trend, QoQ and YoY

(%) QoQ YoY
35
30
25
20
15
10
5
0
(5)
We also note that competition has increased demands for talents which drive personnel
expenses higher accordingly.
By 9M12, operating costs have risen between 11-31% YoY (Exhibit 12) with the top four banks
booking cost-to-income ratios which are 2-400bp higher than levels seen in 9M11.
Management indication has so far suggested that investments will continue to be made in 2013
with BBCA being most aggressive along with BMRI, and BBNI and BBRI the least aggressive, in
our view. Investments in branch network are largely aimed at areas outside Greater Jakarta and
Java whereas investments in transactional channels such as ATMs and CDMs seem to gather
momentum especially in the market leaders BBCA and its primary rival BMRI.
14 November 2012
Exhibit 14: 9M12 operating costs YoY growth
(YoY %)
35 31
30 27
25
25 23
19 20 19
20 17 16
14
15 11
10
5
0
Exhibit 15: Cost to income ratios

(%)
9M11 9M12
70
65
60
55
50
45
40
35
Healthy PPOP growth
The vigorous net interest income growth, added by steady non-interest income growth, have
largely allowed banks to invest without hurting much of their PPOPs especially in the case of
large banks. BBCA, BMRI, BBTN booked robust QoQ PPOP growth while on YoY basis
everyone managed to expand, again with the exception of BBRI. On 9M12 basis, banks booked
between 5-36% growth in PPOP, with BBRI being the largest disappointment (Exhibit 17).
Exhibit 16: 3Q12 PPOP growth trend on QoQ and YoY basis
(%) QoQ YoY
60
50
40
30
20
10
0
(10)
Exhibit 17: 9M12 PPOP growth YoY
(YoY %)
40 36
35 32
30 26 26
25
20
20 17 16
14
15
10 8
5
5 1
0
Generally firm net credit costs on QoQ basis; credit quality still holds steady
On QoQ basis, net credit costs in 3Q12 mostly saw a slight increase, with BBRI being the largest
exception.
Notable highlights on credit costs in 3Q12:
1) BBCA saw an increase in impairment in 3Q12 on the back of lower impairment reversal.
Reversals have more than offset the build up in BBCAs credit costs in the last three
quarters. Management attributed the credit costs to broadly strong credit growth.
2) BBRIs credit cost in 3Q12 was similar to 1Q12, slightly higher than 4Q11 and these are
low quarters for credit costs by its historical measure.
3) BBTN arguably posted the worst trend in credit costs in 3Q12 after booking 2 Qs of net
reversals in 4Q11 and 1Q12 and a net impairment in 2Q12.
Exhibit 18: Quarterly credit costs as % of loans, annualised
5 (%) 2009 2010 2011 1Q12 2Q12 3Q12
(1)

14 November 2012
Gross NPL ratios in general showed mild improvement from 2Q12 levels (Exhibit 19). BBCA was
most impressive with gross NPL ratio down to 0.4% whereas BJBR and BBKP were the poorest
as both posted increases in gross NPL ratios. BJBR suffered some weakness in its fast growing
micro and mortgage segments and BBKPs ex-Bulog gross NPL ratio was at 3.6%, a tad higher
than in 2Q12.
Exhibit 19: Gross NPL ratios on quarterly basis

(%) 3Q11 4Q11 1Q12 2Q12 3Q12
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Exhibit 20: 9M12 net credit costs YoY change

(YoY %)
150
100
50
(50)
(100)
Bottom line largely met expectations
3Q12 net earnings were largely within estimates, making up 75-80% of our full year forecasts.
However BBCAs bottom line was deemed soft by consensus as it made up only 71% of
consensus full year forecast on higher impairment. BJBRs QoQ PBT growth was not
encouraging however it enjoyed corporate income tax benefit in 3Q12, boosting its net profit to
be above estimates.
On YoY basis, all banks recorded growth in 3Q12 pre-tax profit with BMRI, BBTN, BBKP and
BNII posting the strongest growth by virtue of robust expansion in net interest income (Exhibit
21).
On 9M12 basis, all banks also posted strong growth in pre-tax profit of between 8-62% with
BBCA being the softest on higher costs and impairment and BNII the strongest on higher net
interest income and lower impairment (Exhibit 22).
Note that in general, credit costs have generally remained benign YTD, causing pre-tax profit
growth to outpace PPOP growth.
Exhibit 21: 3Q12 PBT growth on QoQ and YoY basis
(YoY %)
QoQ YoY
80
70
60
50
40
30
20
10
0
(10)
(20)
Exhibit 22: 9M12 PPOP growth versus pre-tax profit growth on YoY basis
(YoY %)
PPOP growth PBT growth
70
60
50
40
30
20
10
0
14 November 2012
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.
Distribution in Singapore
This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors or
Accredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investor
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matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd
(DMG).
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See important disclosures at the end of this publication 13

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14 November 2012

3Q12 Results Review

Costs on the rise, impairment on the low. Operating expenses were up to

Maintain Neutral on sector. We rate BBRIs 3Q12 to be the weakest as it was

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

Low cost of funds sustained NIM in 3Q12

Exhibit 1: 3Q12 net interest income growth trend

Exhibit 2: 9M12 net interest income growth YoY

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

Exhibit 4: 9M12 cost of funds versus 9M11

Notable highlights on credit growth in 3Q12:

4) BBTNs growth was most aggressive as it expands outside of housing. Management

Exhibit 5: YoY credit growth trend YTD

Notable highlights on asset yields in 3Q12:

Exhibit 9: 9M12 NIM change YoY

Steady growth in non-interest income

Exhibit 10: 9M12 core fee income growth

Notable highlights in non-interest income in 3Q12

2) BMRIs 9M12 growth of 5% was suppressed by IDR1.4t proceeds of Garuda IPO in

Exhibit 11: 9M12 non interest income growth

Exhibit 12: Total non-interest income over total operating revenue

Source: Company data and DMG research estimates

Exhibit 13: 3Q12 operating expenses trend, QoQ and YoY

Exhibit 15: Cost to income ratios

Healthy PPOP growth

Notable highlights on credit costs in 3Q12:

Exhibit 18: Quarterly credit costs as % of loans, annualised

5 (%) 2009 2010 2011 1Q12 2Q12 3Q12

Source: Company data and DMG research estimates

Exhibit 19: Gross NPL ratios on quarterly basis

Exhibit 20: 9M12 net credit costs YoY change

Bottom line largely met expectations

OSK Research Guide to Investment Ratings

Published and printed by :-

PT OSK NUSADANA SECURITIES INDONESIA

Kuala Lumpur Hong Kong Singapore

Jakarta Shanghai Phnom Penh

OSK Securities (Thailand) PCL

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