+30.3% YoY earnings growth on mixed volume/quality improvement
All conventional banks under our coverage have reported their 1Q23 financial statements, with (consolidated) net profit growth of +30.3% YoY (+14.9% QoQ). The solid net profit growth was driven mainly by two factors: accelerating loan growth and lower provision expenses. Overall, provision expenses booked by banks under our coverage went down by -20.5% YoY, though it went up +29.9% QoQ, mainly due to the low-base effect in 4Q22. BBCA and BBNI booked the largest drop in provision expenses among those banks, 48.2% YoY and 40.3% YoY, respectively. Although most banks booked lower CoC, average NPL coverage spiked to 215.6% (as of Mar-23). Meanwhile, the banks' NIM experienced some pressure (though it was still manageable) as CoF increased by +28bps QoQ and +74bps YoY, and as banks began to increase their TD rates by 50-75bps in 1Q23 because they had to reserve additional cash for the Ramadan/Eid-ul-Fitr Festive Period. The big banks recorded solid PPOP growth (+17.0% YoY), while smaller banks reported slower growth of 7.7% YoY in 1Q23, as the big banks shifted their focus to pushing loan growth in 2023. The overall fee-based income of banks under our coverage continued to book decent growth at +11.8% YoY, which partly helped keep overall earnings growth at a satisfactory level. All-in-all, BBCA booked the strongest 1Q23 YoY earnings growth, thanks to asset quality improvement, which resulted in lower provision expenses, as well as better margin in the middle of high interest rate environment. Regarding the balance sheet, 1Q23 loan growth was recorded at +10.5% YoY and +0.9% QoQ. It is worth noting that big banks continued posting strong 1Q23 loan growth of +10.7% YoY vs. small banks at +8.2% YoY. Consumer loan was the main driver for loan growth in 1Q23 (+10.3% YoY).
Remain positive for 2023F
Following the release of 1Q23 results, we are optimistic that the banks' margins will improve in the subsequent quarters, as some banks still have an abundance of liquidity and were able to only record a 20bps QoQ decline in margins, which is very manageable in our opinion despite the increase in TD rates prior to the Ramadan/Eid-ul-Fitr Festive Period. Except for BBNI, all the banks under our coverage have begun to prioritize loan growth this year, while also maintaining asset quality. Given the ample provision buffers, the cost of credit will continue to decline for the remainder of the year. However, we still have a more cautious view on digital banks, despite the fact that they have begun to post positive earnings in 1Q23. The majority of these banks continued to increase their coverage ratio in 1Q23 by building up provisions. The trend will continue in the future, and NIM may come under pressure as aggressive loan growth requires more funding.
OVERWEIGHT on the sector, with BBNI and BBRI as our top picks
We reiterate our OVERWEIGHT rating on the sector, as we believe that the banks under our coverage can absorb the potential risks of higher NPLs and NIM could still improve in 2023F, especially for the big banks in the middle of an elevated interest rate environment, paving the way for an earnings growth of +12.4% in 2023F. We still prefer big banks to smaller banks, as they will continue to lead the banking sector’s loan growth, and they will be able to enjoy a lower cost of funds amidst tightening liquidity conditions. BBNI (BUY, IDR 12,700) and BBRI (BUY, IDR 6,200) became our top picks in the banking sector. BBNI has done impressive internal revamps, which should lead to better asset quality, and we believe the valuation gap to its closest peer (BMRI) should become narrower. BBRI should be able to book double-digit loan growth in 2023F, aided by the Kupedes program, which will result in a higher NIM despite some pressure from CoF. We also have a BUY rating for BMRI (BUY, IDR 6,600), while BBCA (BUY, IDR 10,300) has a solid outlook in 2023F. Downside risks: slower economic growth than anticipated, weaker NIM and loan growth than expected, and higher cost of credit.