Falling Interest Rates And Indonesia's Economic Growth Will Boost Profitability And Drive Earnings Growth

Key Takeaways

• Indonesia's favorable economic outlook and falling interest rates will support Bank Rakyat's growth and improve profitability.
  
• Enhanced competency in loan management and strong capital levels could lead to better recoveries and increased dividends, attracting investors.
  
• Projected fiscal deficits, weak domestic consumption, rising NPLs, currency depreciation risks, and slowdown in loan growth may pressure Bank Rakyat’s profitability.

Catalysts

Provides various banking products and services in Indonesia and internationally.

• The stable and attractive macroeconomic outlook for Indonesia, including a projected GDP growth of 4.9%-5.1% in 2024, and declining inflation, could support Bank Rakyat's loan growth and revenue expansion.
  
• The bank's liability-sensitive balance sheet stands to benefit from a falling interest rate environment, which should improve funding costs and boost net interest margins and overall profitability.
  
• Strong pre-provision operating profit (PPOP) growth, driven by non-interest income and improved operating leverage, indicates continued earnings growth potential.
  
• The enhanced loan officer competency and the focus on collections and asset quality in the microsegment are expected to yield better recoveries, thus positively impacting net margins and reducing the cost of credit.
  
• Expanding capital levels and an elevated capital adequacy ratio suggest potential for increased dividend payouts, which could attract investor interest and enhance shareholder value while maintaining strong earnings retention.

Bank Rakyat Indonesia (Persero) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank Rakyat Indonesia (Persero)'s revenue will grow by 25.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.3% today to 33.1% in 3 years time.
• Analysts expect earnings to reach IDR 87413.5 billion (and earnings per share of IDR 514.55) by about December 2027, up from IDR 61172.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, up from 10.2x today. This future PE is greater than the current PE for the ID Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 4.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.83%, as per the Simply Wall St company report.

Bank Rakyat Indonesia (Persero) Future Earnings Per Share Growth

Risks

• The projected larger fiscal deficit in 2024 could indicate higher government borrowing, which may lead to increased interest rates—potentially impacting Bank Rakyat’s net interest margins and overall profitability.
  
• The weak domestic consumption and households shifting to lower-priced alternatives may signal reduced demand for consumer loans, impacting Bank Rakyat’s revenue growth from this sector.
  
• The continued elevated levels of non-performing loans (NPLs) in the micro and ultra-micro segments, despite improvements in overall asset quality, could pressure the bank’s earnings by necessitating higher provisions for bad debts.
  
• The potential depreciation of the Indonesian rupiah could result in higher costs for foreign currency liabilities, affecting the bank’s funding costs and potentially reducing net margins if not adequately offset.
  
• A slowdown in loan growth, particularly in corporate and micro segments, may not meet targets and could adversely affect overall revenue growth projections, especially if macroeconomic conditions do not improve as expected.

Valuation

• The analysts have a consensus price target of IDR 5692.48 for Bank Rakyat Indonesia (Persero) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR 6800.0, and the most bearish reporting a price target of just IDR 4500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be IDR 264168.1 billion, earnings will come to IDR 87413.5 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 13.8%.
• Given the current share price of IDR 4150.0, the analyst's price target of IDR 5692.48 is 27.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.