Above; upgrade to Neutral from Underperform. FY10 results were ahead of consensus and our expectations, with net and core profits at 105% and 128% of the respective forecasts, owing to better-than-expected topline growth and low provisioning charges, as the bank slashed its provisioning coverage to 128% from 335.5% at Dec 09. PPOP was 10% higher than our forecast. We upgrade the stock to Neutral on a higher loan-growth outlook, though expecting asset quality and NIM to face more pressure. Factoring in higher loan growth, we raise our FY11-12 EPS estimates by 31-42%, after adjusting for new shares from its rights issue. We also introduce FY13 forecasts. Following this, we have a new target price of Rp14,600 (from Rp7,100), still based on GGM valuation with a discount rate of 16.2% and implying 3.1-2.4x CY11-12 P/BV.
• Strong topline growth. 2010 was a strong year for the bank, with 48% yoy loan growth far outpacing sector growth of 23%. Micro loans were the star, supported by a surprising 40% increase in pension loans, about double its historical average. There was an unusually high number of new pensioners in 2010, with a similar boost unlikely in the near future. NIM climbed from 10.1% in FY09 to 13.9% in FY10 as the bank continued to expand its high-yielding micro segment. However, NIM may have reached its peak at 15.0% in 2Q10 as lower NIM for 3Q10 and 4Q10(13.3% and 13.5%) seem to signal normalisation, especially amid benchmark rate increases and intensifying competition in 2011.
• Cost of credit crept up. The bank posted its fourth consecutive quarter of higher cost of credit (provisioning plus net write-offs), which increased from -0.2% in 4Q09 to 2.4% in 4Q10. NPL ratio also went up to 1.1% in 4Q10 from 0.5% in 4Q09. We expect continuing pressure on asset quality as its micro loans mature.
• Lower cost-income as expansion slowed down. BTPN maintained cost-income ratio at a stellar 53.4% in 4Q10 following 52.8% in 3Q10, further solidifying its turnaround from previously high ratios of 68.8% in 4Q09. We expect the ratio to stay below 60.0% as the bank switches away from a focus on expansion to harvesting its established network. After massive openings of 500 branches in 2009, BTPN opened 13 branches in 2010, and plans to add only 20 in 2011.
