RHB Indonesia Morning Cuppa - 26 October 2016- (Bank Tabungan Negara, BBRI, BMRI)

Good morning,

Bank Tabungan Negara: Better Days Ahead

Weexpect BBTN to generatesustainable earnings growth going forward, driven byits focusonthemortgage segment, manageable credit cost and improvementsin asset quality. Subsidised mortgageshouldcontinue to support its loan book expansion astheGovernmentisallocating atotalofIDR15.2trnfromits 2017 state budget.With substantial mortgage exposure,BBTN’scredit cost and loan loss coverage (LLC) ratioshouldcontinue to be manageable as the loansarealready secured by the properties. Maintain BUY and GGM-based IDR2,420 TP (25% upside).

¨ Earnings growth outlook.We expect Bank Tabungan Negara’s (BBTN) earnings growthto be sustainable,backed byhigher loans volume,mostly coming from subsidised mortgage. In addition, non-subsidised mortgage would be the second contributortoits loans book as it wouldbe able to tap intothelow income segment(with maximum mortgage size of IDR200m)that does not match the requirements forsubsidised mortgage. BBTN should also benefit from lower corporate tax rate of c.20% (previously 25%) this yearas the company has secured40% free floatfor its shares. All in, we expect its earningstogenerate a 23%3-yearCAGR for 2016F-18F.

¨ Manageable asset quality.BBTN’s September NPLs stood at 3.6%, still relatively manageable in our view. We anticipate gross NPLstoimprove to 3% by end-2017F. Giventhe company’sstrategytomaintain mortgage asits core business, credit costshouldremain manageable at 63.5bps and 65.1bps in FY17F-18F as it buildup itsLLC ratio to 47.9%/48.8% by end-2017F/2018Frespectively.

¨ 3QFY16 earnings – below expectations

¨ Maintain BUY. We maintain our BUY call on BBTN due to:

i. Its strong focus in the subsidised mortgage segment;

ii. Manageable credit cost; and

iii. Improvements in asset quality with manageable credit cost.

Our GGM-based IDR2,420 TP is based on FY17F P/BV of 1.2x (0.25SD to its historical mean) and 8.8x P/E. (Eka Savitri)

Link to report: Bank Tabungan Negara : Better Days Ahead

Link to Daily report: Indonesia Morning Cuppa - 261016

Results Review:

Bank Rakyat Indonesia (BBRI IJ, BUY, TP IDR14,500) - Micro Lending To Support Further Growth Ahead

We expect decent earnings growth for BBRI, supported by higher loans growth and manageable credit costs. Loans growth should be underpinned by the Government’s target on its KUR programme, which should boost BBRI’s commercial micro lending going forward –where borrowers need to obtain loans of more than IDR25m. The additional micro borrowers would also support BBRI’s fee-income base. We are already projecting lower loan yields due to higher KUR portion in its micro lending book. Maintain BUY with unchanged GGM-based TP of IDR14,500 (19% upside).

¨ Earnings growth outlook. We are projecting earnings growth of 7.8% in 2017 for Bank Rakyat Indonesia (BBRI),with relatively stable credit cost of 228bps, which would maintain its loan loss coverage (LLC) ratio at the minimum level of 150%. Moreover, BBRI is expected to continue optimising its loan-to-funding ratio (LFR) in order to manage its superior net interest margin (NIM) at 8%.BBRI’s 9M16 results were inline with our expectations.

¨ Maintain focus on micro lending. BBRI’s loan book would still be dominated by micro lending, particularly with the Government’s Kredit Usaha Rakyat (KUR) micro lending program. Under KUR’s current scheme, the Government provides a 10% subsidy while borrowers incura lending rate of only 9%. For next year, the Government has already proposed lower lending rates of 7% to be paid by KUR borrowers, and are still in discussions with participating banks on the subsidy. We have already assumed lower loan yields of 13.2% in FY17 due to the expected higher portion of KUR (27%)in micro lending (Sep: 22.6%).

¨ 3Q16 earnings – inline

¨ Maintain BUY. We maintain our BUY call on BBRI, supported by its strong loans growth from micro lending, superior NIMs, and potentially higher fee-income from c.50m customer accounts. Our GGM-based TP of IDR14,500 implies FY17F P/BV of 2.15x (-0.75SD of its historical mean), and P/E of 13x. (Eka Savitri)

Link to report: Bank Rakyat Indonesia : Micro Lending To Support Further Growth Ahead

Bank Mandiri (BMRI IJ, Neutral, TP IDR11,600) - Still weak due to high provisions

Last night BMRI held an analyst meeting on its 9M16 results. Currently BMRI trades at 2017F P/BV multiple of 1.5x (-1SD of its historical mean).

Key highlights:

9M16 performance:

¨ Net interest income represents 79.6%/77.6% of our/consensus forecast supported by 11.5% YoY loans growth.

¨ Net interest margin (NIM) expanded to 6.5% due to one time payment from Raja Garuda Mas’ (RGM). If we strip off such loans, then normalised NIM stood at 6.2%.

¨ Cost to income ratio (CIR) improved to 42.2% from 43.3% due to a manageable opex growth.

¨ Gross non-performing loans (NPL) ratio rose to 3.8% (Sep-15: 2.8%), inline with our projection of 3.8%.

¨ Credit cost hover at 350bps, far above BMRI’s management guidance of maximum 320bps.

¨ Net profit of IDR12trn accounted for 67.7%/70.4% of our/consensus forecast.

3Q16 performance:

¨ Net interest income up by 21% QoQ coming from one time payment from RGM which consequently brought up its NIM.

¨ Blended CoF dropped to 3.2% in 3Q16 despite stable CASA deposits to total customer deposits of 63.3% (June: 63.6%).

¨ Credit cost jumped to 398bps as BMRI’s management aims to building up its loan loss coverage (LLC) ratio at above 130% level.

¨ With lower tax expenses, net profit grew by 14.2% QoQ.

What we miss:

¨ Higher than expected credit cost of 350bps as the pressure in asset quality remain the main concern. BMRI’s management guided even for higher credit cost by 10bps from its upper range target of 320bps.

What to expect:

¨ Loan growth would start to pick up in FY17 at 12.4% as we anticipate BMRI’s management would continue to focus on improving its assets quality until 1Q17 at the soonest.

¨ Asset yield would continue to fall due to lower loan yield coming from higher corporate lending exposure. We expect lower asset yield at 8.4% in FY17 (FY16: 8.8%).

¨ NIM would fall to 5.7% for FY17 (FY16: 5.9%) in our forecast mostly coming from lower asset yields projection.

¨ We expect gross NPLs ratio would improve to 3.5% by end of year then further fall to 3.1% by end-2017 with improvement also in credit cost from 260bps this year to 219bps as BMRI would focus towards corporate lending which require lower credit cost compared to commercial and SME lending. (Eka Savitri)

Unilever’s 3Q16 earning reached IDR1.5trn (-16% QoQ. +14% YoY), in line

Unilever Indonesia reported broadly inline results with 3Q16 earning reached IDR1.5trn (-16% QoQ, +14% YoY), achieving 74% of our full-year estimates. On QoQ basis, lower quarterly earning was driven by seasonally low sales in 3Q16, after peak sales during the Lebaran in June. On YoY basis, earnings improved 14% YoY driven by higher sales and widened EBIT margin.

QoQ, Unilever’s 3Q16 EBIT declined to IDR2trn (-14% QoQ, +16% YoY). However, Food & refreshement’s 3Q16 EBIT increased to IDR462bn (+17% QoQ, 31% YoY) thanks to better EBIT margin which improved to 16.7% in 3Q16 (2Q16: 10.9%). On the other hand, home personal care (HPC)’s 3Q16 EBIT declined to IDR2trn (-18% QoQ, 14% QoQ).

Total opex-to-sales ratio slightly increased to 30.1% in 3Q16 (from 29.2% in 2Q16) which driven by higher advertising & promotion expenses to sales ratio which increased to 11.9% in 3Q16 (from 11.5% in 2Q16).

Maintain Neutral with DCF-based TP of IDR48,500 (9% upside), implying 52x FY17F P/E. (Andrey Wijaya)

Media Highlights:

Economics

OJK revised loan growth outlook to 6-8% for 2016

Indonesia to see tax shortfall of IDR218trn for FY16

Corporates

Adhi to prioritise Adhi Persada Gedung IPO

Lippo Karawaci issued bonds worth USD425m

Waskita Karya revised new contract target to IDR70trn for FY16

Bank Danamon recorded +33% YoY in net profit

Jasa Marga to conduct IDR1.78trn right issue

Metropolitan Land is optimistic can exceed presales target