RHB Indonesia Morning Cuppa - 10 October 2016- (Bank Central Asia)

Good morning,

Bank Central Asia: Focused On Improving Asset Quality

We downgrade our recommendation on BBCA to NEUTRAL (from Buy), with a new IDR17,200 TP (from IDR15,700, 9% upside). This is as we expect the bank’s LLC ratio to elevate to 247.3%, as we estimate an NPL ratio of 1.1% by end-2016. This is despite the former dropping to 193.4%, its lowest point since Jun 2009, which indicates management’s higher risk tolerance. Note too that BBCA’s market share has shrunk, as rivals expand their deposits, particularly on CASA.

¨ Focused on improving asset quality. With indication on some small corporate borrowers being downgraded to NPL status (ie IDR200bn loan size), Bank Central Asia (BBCA) continues to face challenges in improving asset quality. Management also did not give clear guidance on what its comfortable LLC ratio level would and emphasised more on each individual case of LLC levels. Therefore, we estimate LLC ratio to reach 247.3% by year’s end, as NPL is to improve to 1.1% in the same period. Such figures are based on our assumption that the bank is to allocate IDR1.9trn in provisions and IDR1trn in write-offs in 2H16 (1H16: IDR1.8trn in provisions, IDR692bn in write-offs).

¨ Lower deposit market share. BBCA continues to lose market share in customer deposits (June: 10.7% vs Jun2011: 11.7%), as it maintains high levels of cheap funding sources, ie current account, savings account (CASA) deposits. This strategy is to assure a low blended cost of funds (CoF).As a result, we expect its CASA deposits market share to fall to 14.9% by end-2017 (June: 15.3%). This is on the back of tougher competition, mostly coming from two other big banks, Bank Rakyat Indonesia (BBRI) (BBRI IJ, BUY, TP: IDR12,900) and Bank Mandiri (BMRI) (BMRI IJ, NEUTRAL, TP: IDR11,600).

¨ NPL to increase in 3Q16.With its 3Q16 results scheduled to be announced later this month, we expect BBCA’s performance to be in line with our estimates. NIM is not a likely issue, given itsability to maintain a low blended CoF. This is due to a high portion of CASA deposits in its funding structure. However, we still anticipate major provisions in 3Q16 to provide an ample LLC ratio, as management has guided for higher NPL ratiosof 1.5-2% for 3Q16.

¨ Downgrade to NEUTRAL (from Buy), new a IDR17,200TP (from IDR15,700).We downgrade our recommendation to NEUTRAL with a new IDR17,200 TP as we rollover our valuation to 2017. We derive our GGM-based TP by assuming a 18.9% sustainable ROE, 8% cost of equity and 3% long-term growth.

¨ Risks to our call are faster-than-expected improvements in asset quality, BBCA’s ability to maintain market share in deposits(particularly CASA), and a sharp decline in yields from non-loan-earning asset instruments, which result in further asset yield declines. More players tapping into the high-end mortgage segment (loan size of IDR1bn) with competitive lending rates is also a risk. Note that BBCA offers a promotional rate of 7.99% for the first three years, before it is capped at 8.99% for the next three years. (Eka Savitri)

Link to report: Bank Central Asia : Focused On Improving Asset Quality

Link to Daily report: Indonesia Morning Cuppa - 101016