Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

We have not written about an Indonesian lender for some time given relative valuations across EM. However, on the back of BJBR’s positive fundamental momentum and relatively attractive valuations versus other Indonesian lenders, we initiate a constructive note. The bank does just pass our theoretical threshold of A FV of 10% and a PBV of &lt;1x. We would attach greater value to Indonesian franchises in theory given elevated Profitability and NIM levels and higher growth potential in conjunction with dynamic Fintech innovations.BI has provided liquidity to the banking system in response to the pandemic and cut its policy rate by a total of 100bp since February 2020 to 4.0%. (Interest Rate in Indonesia averaged 6.84 percent from 2005 until 2020). We expect BI to keep the rate unchanged, provided the economy does not deteriorate further, given a mindful stance on the volatility of the rupiah. Private credit represents only 36.4% of GDP and the banking sector's capital-adequacy ratio remained strong at 22.1% in May 2020.We also see recent corporate activity in the Islamic Banking space as a trigger for improving efficiencies and opportunity moving forward. The proposed merger of 3 state-owned Islamic banking units comes at a time when demand for Shariah-banking is on the rise, especially among the middle class. Despite being home to the largest Muslim population in the world, Indonesia has been arguably trailing behind Malaysia in Shariah-compliant Capital Markets. The size of Indonesia’s Islamic banking business pales into significance vis-à-vis the Persian Gulf, though relatively rapid economic growth in recent years and government initiatives may narrow the gap.PT Bank Pembangunan Dearah Jawa Barat Dan Banten (BJBR) results at Q320 are satisfactory. Our PH Score™ shows that the bank is making moderate headway on Profitability, maintaining elevated NIMs and Interest Spreads, as well as revealing benign trends in Liquidity (LDR and Liquid Asset Ratio), spurred by vibrant deposit expansion, in Provisioning, and in headline Asset Quality. However, Capital Adequacy reveals some erosion. While the top-line shows solid growth, non-interest Income remains subdued. Efficiency could also be a great deal better: maybe increased competition in the sector will act as a catalyst to improve “jaws” and the CIR going forward. The bottom-line was impacted higher by lower Credit Costs, as elsewhere, in part related to lower Problem Loans and much lower Net Charge-offs. Comprehensive Income and Net Profit still showed forceful progression YoY, up 21% and 16%, respectively, YoY. In general, we have a broadly constructive picture though we are mindful of some Balance Sheet risks and look forward to a much better showing on the Efficiency front over the next few quarters.A FV of 10%, a PBV of 0.98x, an Earnings Yield of 14.9%, and a Dividend Yield of 8.5% are certainly not unappealing. A PH Score™ of 7.4 is in the top quartile globally.<div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </div>

We have not written about an Indonesian lender for some time given relative valuations across EM. However, on the back of BJBR’s positive fundamental momentum and relatively attractive valuations versus other Indonesian lenders, we initiate a constructive note. The bank does just pass our theoretical threshold of A FV of 10% and a PBV of &lt;1x. We would attach greater value to Indonesian franchises in theory given elevated Profitability and NIM levels and higher growth potential in conjunction with dynamic Fintech innovations.BI has provided liquidity to the banking system in response to the pandemic and cut its policy rate by a total of 100bp since February 2020 to 4.0%. (Interest Rate in Indonesia averaged 6.84 percent from 2005 until 2020). We expect BI to keep the rate unchanged, provided the economy does not deteriorate further, given a mindful stance on the volatility of the rupiah. Private credit represents only 36.4% of GDP and the banking sector's capital-adequacy ratio remained strong at 22.1% in May 2020.We also see recent corporate activity in the Islamic Banking space as a trigger for improving efficiencies and opportunity moving forward. The proposed merger of 3 state-owned Islamic banking units comes at a time when demand for Shariah-banking is on the rise, especially among the middle class. Despite being home to the largest Muslim population in the world, Indonesia has been arguably trailing behind Malaysia in Shariah-compliant Capital Markets. The size of Indonesia’s Islamic banking business pales into significance vis-à-vis the Persian Gulf, though relatively rapid economic growth in recent years and government initiatives may narrow the gap.PT Bank Pembangunan Dearah Jawa Barat Dan Banten (BJBR) results at Q320 are satisfactory. Our PH Score™ shows that the bank is making moderate headway on Profitability, maintaining elevated NIMs and Interest Spreads, as well as revealing benign trends in Liquidity (LDR and Liquid Asset Ratio), spurred by vibrant deposit expansion, in Provisioning, and in headline Asset Quality. However, Capital Adequacy reveals some erosion. While the top-line shows solid growth, non-interest Income remains subdued. Efficiency could also be a great deal better: maybe increased competition in the sector will act as a catalyst to improve “jaws” and the CIR going forward. The bottom-line was impacted higher by lower Credit Costs, as elsewhere, in part related to lower Problem Loans and much lower Net Charge-offs. Comprehensive Income and Net Profit still showed forceful progression YoY, up 21% and 16%, respectively, YoY. In general, we have a broadly constructive picture though we are mindful of some Balance Sheet risks and look forward to a much better showing on the Efficiency front over the next few quarters.A FV of 10%, a PBV of 0.98x, an Earnings Yield of 14.9%, and a Dividend Yield of 8.5% are certainly not unappealing. A PH Score™ of 7.4 is in the top quartile globally.The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

BJBR: Positive Fundamental Momentum at a Decent Valuation

Bank BJB

BJBR: Positive Fundamental Momentum at a Decent Valuation