Company update: BMRI

The management of BMRI emphasized earlier this year that it would place a high priority on its liquidity and assets quality over profitability amidst the higher interest rates environment. As a result, BMRI’s proportion of CASA has edged down to 64.3% as of June 2014 from 65.2% as of March 2014. Nonetheless, retail deposits dominated the bank’s deposits structure. This is significant since retail deposits should have a lower blended CoF than wholesale-based deposits. Besides having a well-diversified deposits structure, margins were relatively flat with the NIM at 5.7% in 2Q14 backed by the bank’s sizeable VR government bonds (Rp66.0 tn as of June 2014). Utilizing a DBV model with 15.7% cost of equity, 6.0% terminal growth rate and rolling over our valuation to 2015F, we arrive at our new Target Price of Rp12,400, implying PBV 2.5-2.2x for 2015-16F. BUY maintained. A well-diversified deposits structure Given the management’s priority of focusing on liquidity amidst the higher interest rates environment, the proportion of CASA edged down to 64.3% as of June 2014 from 65.2% as of March 2014. Nonetheless, retail deposits still dominate its deposits structure (70.1% as of June 2014 vs 68.3% as of December 2013). This is significant since retail deposits should have a lower blended CoF than wholesale-based deposits. Even so, the bank’s blended CoF rose slightly by 20 bps, up from 3.9% in 1Q14 to 4.1% in 2Q14. Going forward, we believe the CASA proportion will fall to 62.0% as of December 2014F, before gradually rising to 63.0% as of December 2015F with a higher blended CoF of 3.7% in FY14F but then falling to 3.6% in FY15F. Flat margins thanks to its VR government bonds The bank’s management has already stated that it would prioritize its liquidity and assets quality over its profitability during the currently challenging environment. As a result, BMRI’s interest expenses grew 9.8% QoQ in 2Q14 whereas its interest income only grew by 4.6% QoQ. Nonetheless, the bank was still able to maintain its NIM at 5.7% in 2Q14 backed by its sizeable floating rate government bonds (Rp66.0 tn as of June 2014). BMRI has also been re-profiling its government bonds portfolio towards fixed rate instruments with Rp6.4 tn net additions YtD. This strategy looks sensible in our view given that now might be the right time to unload its VR bonds as the VR rate is currently more favorable for buyers. Rollover to 2015F: BUY with new TP of Rp12,400 Given the weak 2Q14 result, we adjust some of the key assumptions in our model given the challenges going forward. We cut our loans growth target for 2015-16F to 14.1% and 15.5%, whilst expecting deposits to grow by 12.7% and 13.5% in 2015-16F, respectively. We also tweak our blended CoF assumption from 3.1% in FY15-16F to 3.6% and 3.4% in FY15-16F, respectively. As a result, net profits growth will be softer in FY14-16F at 6.9%, 9.0% and 10.4%, respectively. Utilizing the DBV model with a 15.7% cost of equity, 6.0% terminal growth rate and rolling over our valuation to 2015F, we arrive at our new Target Price of Rp12,400, implying PBV of 2.5-2.2x for 2015-16F. BUY maintained.

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