Banking Beyond Bounds

Last Friday wrapped up with a not-so-harmonic note for US stocks, playing the worst tune since the collapse of the Silicon Valley Bank in March, indicating the market's three-month rally may have come to an end.

Investor confidence was shaken by aggressive central bank tightening measures overseas. The Bank of England surprised the market by raising its key interest rate by half a percentage point, and central banks in Switzerland, Norway, and Turkey also implemented rate hikes.

As the tides of financial tightening sweep across the industry, the banking landscape finds itself in a state of adjustment. The increased Fed Rate and BI7DRRR since last year have contributed to this widespread tightening.

The Comparison of Interest Rates Between BI and The Fed

However, there is an expectation that interest rates have now peaked due to the gradual easing of inflation.

The Comparison of Inflation Between Indonesia and the US

Moreover, loan interest rates have also begun to rise, although not as high as the increase in benchmark interest rates. The moderate increase in loan interest rates compared to the benchmark rate is due to banks "pushing" for their credit growth targets.

Source : Otoritas Jasa Keuangan

And it appears that this has also become one of the strategies for Bank BTN.

In the ever-evolving landscape of the banking industry, BBTN sets its sights on strategic moves and transformative initiatives to fortify its position.

One of the bank's remarkable endeavors was its ongoing asset restructuring. Anticipating approval from the OJK, BBTN eagerly awaited the green light expected to be issued in the second half of 2023. This approval would mark the beginning of a pivotal phase as the bank set its sights on asset sales.

With a grand plan to restructure a total of IDR 5-6tn in underperforming construction and commercial loans, this would not only result in a healthier balance sheet but also a significantly higher loan loss coverage, securing the bank's future stability.

As BBTN embarked on its transformation, the bank strategically shifted its focus towards higher-yielding consumer lending. Gradually, they turned their attention to non-subsidized mortgages, home equity loans (KAR), and payroll loans (KRING).

With an optimistic outlook, the bank projected a gradual upturn in loan growth, poised to reach an impressive 10% within the same timeframe.

However, amidst the exciting developments, the high cost of funds presented a hurdle that needed to be overcome. In the first quarter of 2023, BBTN experienced a blended cost of funds of 3.62%, compared to 2.6% in 2022.

This comprised time deposit rates of 5.17%, wholesale funding at 6.39%, and CASA at 2.06%. The recent increases in the cost of funds, with current account rates reaching up to 4.0% and time deposits at 5.25%, were cause for concern.

Despite the challenge posed by the high cost of funds, BBTN remained resilient and determined to find a way forward.

In the face of ever-changing landscape, BBTN's earnings outlook remained stable. Projections indicated profits of IDR 3.0tn and IDR 3.1tn in the years 2023-2024, remaining relatively unchanged from the 2022 profit of IDR 3.05tn.

As investors considered their options, BBTN's appealing valuation caught their attention as the bank trades at 5.7x PBV/ROE, only a slight discount to BBNI. BBTN traded at an undemanding 0.6x forward PB ratio, which stood at -1.4 SD below its 10-year mean. They also set ambitious goals, aiming to attain a remarkable ROE of up to 15% by 2025, surpassing the 13% achieved in the 1Q23.

Our Head of Research, Edward recommends a BUY position with a TP of 1,640, based on a 15.1% cost of equity, and a sustainable ROE of 14.3%, reflected a forward 12-month PB ratio of 0.8x, equivalent to -0.7 SD of its 10-year mean PB.

In this captivating journey of growth and transformation by navigating through asset restructuring, exploring new lending avenues, tackling cost challenges, and seeking ways to further expand its services, BBTN stood poised to seize the opportunities that lay ahead and emerge as a stronger, more resilient banking institution.