Indonesia's economy kicked into high gear last quarter, thanks to strong consumer spending that managed to withstand the effects of increased interest rates, ongoing high prices, and a slowdown in commodities.
The country's GDP saw a 5.17% rise in the three months ending in June compared to the same period the previous year. On qoq basis, the economy grew by 3.86% when compared to 1Q23. This marks the quickest qoq growth rate in over two years.
The unexpected growth spurt allows Bank Indonesia to maintain the borrowing costs at four-year high, with the BI 7-Day Reverse Repo Rate at 5.75% - in line to safeguard currency stability and counter the uncertainties of the global economy. The lending and deposit rates are set at 6.5% and 5.0%, respectively.
As anticipated by our head economist, Mike, this choice aligns with the monetary policy direction aimed at keeping inflation in check within the target range of 3±1% for the rest of 2023 and 2.5±1% in 2024.
Source: Sucor Sekuritas
With robust growth in the local economy and a healthy level of liquidity within the banking system, BI took the opportunity to prioritize enhancing loan disbursement to support economic growth. This strategy aims to bolster economic activity, especially considering the worldwide economic slowdown.
It is noted that loan disbursements grew 8.54% (yoy) in Jul-23 or increased from 7.76% (yoy) from Jun-23. The growth was influenced by social services, mining sectors. Meanwhile, Sharia credit grew higher at 17.55% (yoy)
The growth we're seeing is primarily fueled by the distribution of capital from loans provided by the major banks. Out of all the major banks, BBRI was comparatively delayed in disclosing its 1H23 outcomes – the eagerly awaited results were finally unveiled yesterday! They managed to attain an impressive net income of Rp 29.4 tn, reflecting an 19% yoy increase.
BBRI's total loans grew by 9.2% yoy. Notably, their Kredit Umum Pedesaan (Kupedes) product experienced robust growth of 43% yoy. Aligning with the focus on commercial micro products with better NIM in the post-pandemic growth strategy.
Source: Company
Currently, Kupedes now constitutes 15% of BBRI consolidated loan books, up from 11% in 2022. Additionally the ultra-micro product (PNM & Pegadaian) played a role in micro loans comprising 48.1% of total micro loans. Whereas, the medium business segment contributed most growth at 22.7%. Reiterating BBRI’s focus as a pioneer of microfinance in Indonesia and a reliable MSMEs loan provider.
In a recent partnership with Paper Indonesia, BBRI launched a business credit card as part of boosting loan disbursement strategy, targeting the MSME market. Collaborating with business owners to promote this fresh product on social media boosts exposure to the right target market and enhances its relatability edge.
Source: Company
This card offers extended payment terms of up to 55 days, comes with its dedicated payment app, and opportunities for cashback benefits!
Nevertheless, the expansion in loans is part of a meticulously planned strategy. The cost of credit is consistently improving annually at 2.26%, in line with the FY23 goal of 2.2%-2.4%. The management is strategically tapping into the substantial loan loss reserve to expedite the clearance of bad loans stemming from the effects of the COVID-19 pandemic.
Source: Company
Despite the liability sensitive balance sheet, BBRI’s ROE is at an impressive 23.1% and NIM at 7.85%, surpassing the target for FY23. The composition of its revenue-generating assets is improving, and it has successfully managed to offset the rise in funding costs.
The proportion of loans to total revenue-generating assets has grown, aided by a transition to more lucrative loan types, which bodes well for bolstering margins in the future.
Source: Company
Parallely, the steadfast focus on the CASA strategy has effectively kept the Cost of Funds at 2.79%, significantly below 10-year average historical level, which stood at 3.41%.
This strategy has been instrumental in promoting deposit growth and driving a 37 basis points yoy increase in the CASA Ratio, now at 65.5%. Additionally, contributions from EDC merchants' revenues and the successful penetration of BRIMO- BRI's digital banking application, have played a pivotal role.
Therefore, we project a robust yoy earnings growth of 13% for BBRI in 2023, primarily driven by its strong position in the micro-lending sector. We uphold our BUY recommendation, increasing the target price to Rp. 6200, indicating a valuation of 2.7x 2024F PB.
We're feeling great about how the big banks are holding up, even with all the ups and downs in the world economy. Good things are happening in the Indonesia banking sector, supported with strong GDP growth, increased consumer spending, and boost in healthy loan disbursement.
On the side note, the IHSG went past Rp.7000 yesterday - for the first time this year! Seems like the stock market is gaining back investors’ confidence! Always excited to hear from you and discuss our calls!
Read our full report here:
https://bit.ly/BBRI_MarginToDriveEarnings