NPL recovery to support future earnings

Lower-than-expected results. BBTN booked a net profit of IDR 673bn in 2Q23 (-16.0% QoQ, -3.4% YoY), bringing its cumulative 6M23 net profit to IDR 1.47tn (+0.2% YoY), falling short of our estimates (43.7% of our full-year forecast) and consensus (45.7%). The lower-than-expected bottom line was mainly caused by the increase in interest expense to IDR 7.04tn (+42.6% YoY) in 1H23. The bank’s NII dropped -19.4% YoY in 2Q23, as its CoF started to increase to 3.90% in 1H23 vs. 2.92% in 1H22. As of Jun-23, BBTN’s loan growth only reached 7.5% YoY, still driven by subsidized mortgages (+10.8% YoY). Regarding asset quality, BBTN's NPL ratio increased as some of its restructured loans were degraded to NPL, as there has been no Covid-related debt restructuring since November ‘22. Consequently, BBTN's NPL coverage ratio fell to 139% in 2Q23 from 146% in the previous quarter, while its LAR coverage ratio remained relatively stable at 22%.

NPL recovery strategies. BBTN will implement several strategies to reduce its NPL ratio; 1) partnering with IFG for insurance claim payment for any bad loans. potentially raising IDR 277bn from claims that have not yet been disbursed, which is expected to be received within this year and could increase BBTN's non-interest income; 2) Collaborate with large buyers, such as multi-finance companies, developers, and end-users, to sell BTN's ready-to-sell assets, including bonds, working capital loans, and KPR Maju. It is important to note that the total asset sales target is around IDR 1 trillion. 3) promoting KPR Maju, which is essentially a mortgage facility for BBTN's Ex-NPL & write-off mortgage recycle product and offers higher mortgage rates (1-2% more) than subsidized mortgages.

2023F guidance. BBTN still aims to book 10-11% loan growth this year, supported by subsidized mortgages, as the gov’t has allocated IDR 25.8tn (+12.2% YoY) to provide mortgage interest subsidy for low-income households in 2023F. BBTN expects its NIM to reach 3.9%-4.0% this year, lower than its previous guidance but higher than the 1H23 figure of 3.62%, as it targets a gradual reduction in its wholesale funding portion (since it bears the highest CoF) by enhancing retail and transaction banking businesses and increasing product holdings through cross-selling strategies.  Cost of Credit (CoC) is expected to drop to 1.1%-1.2% in 2023F vs. 1.3% in 2022, while the NPL ratio is expected to fall below 3% in 2023F, boosting its NPL coverage ratio to > 160% this year.

Maintain our BUY rating with a lower TP of IDR 1,500/share. Given that the backlog of home ownership in Indonesia is expected to remain over 12.7 million in 2023, BBTN still has massive growth potential. In a high-rate environment, however, BBTN faces the risk of having a higher CoF than its peers due to its high LDR ratio and its recent efforts to expand its loan portfolio in the commercial segment, which could result in higher NPL and CoC. We maintain our BUY rating with a 12-month TP of IDR 1,500 per share, implying a PBV multiple of 0.6x for 2023F. Downside risks include a weaker-than-anticipated economic recovery, lower-than-anticipated NIM and loan growth, and increased credit costs.