Loan Restructuring And Stricter Lending Could Strengthen Indonesia's Banking Sector

Key Takeaways

• Efforts to improve asset quality and restructure problem loans may reduce non-performing loans, enhancing margins and return on equity.
  
• Strategic growth in lending, higher CASA ratios, and sector diversification could boost revenue, profitability, and net interest margins.
  
• Challenging macroeconomic conditions and asset quality issues in micro segments may pressure Bank Rakyat Indonesia's revenue growth, earnings stability, and profitability.

Catalysts

Provides various banking products and services in Indonesia and internationally.

• The focus on improving asset quality and restructuring problem loans, particularly in microfinance, and the implementation of stricter lending criteria could lead to reduced non-performing loans. This can improve net margins and enhance return on equity.
  
• The anticipated rate cuts in 2025 may decrease the cost of funds due to lower interest rates, potentially boosting net interest margins and overall profitability.
  
• Growth initiatives in SME, corporate, and consumer lending, particularly leveraging partnerships for mortgage growth, could support revenue growth and diversification, driving higher earnings.
  
• A strategic increase in the loan-to-deposit ratio and higher CASA ratio might contribute to greater interest income and efficiency, positively impacting net interest margins.
  
• Potential expansion in wholesale banking, focusing more on private sector clients, and strategic shifts towards higher-margin sectors like agriculture, FMCG, and mining could enhance revenue and profitability over the medium term.

Bank Rakyat Indonesia (Persero) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank Rakyat Indonesia (Persero)'s revenue will grow by 22.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.4% today to 29.6% in 3 years time.
• Analysts expect earnings to reach IDR 71559.6 billion (and earnings per share of IDR 479.5) by about March 2028, up from IDR 60154.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as IDR61783.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from 9.3x today. This future PE is lower than the current PE for the ID Banks industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.27%, as per the Simply Wall St company report.

Bank Rakyat Indonesia (Persero) Future Earnings Per Share Growth

Risks

• The macroeconomic environment in Indonesia shows a shift away from household consumption toward net exports, reflecting weak consumption in middle and lower-income segments, which could pressure revenue growth in the retail banking sector.
  
• Asset quality deterioration, particularly in the micro asset segment with a spike in special mention loans and high net downgrades to non-performing loans, poses a risk to net margins and earnings stability.
  
• Slower loan growth than historically experienced, particularly in the micro and small business segments, may impact revenue generation and overall profitability.
  
• Increased provisions and write-offs due to asset quality issues, including unresolved COVID-19 restructured loans, could pressure earnings in the short to medium term.
  
• Regulatory and policy risks, such as the impact of government-set KPIs for loan graduation and modifications, can lead to elevated credit costs, impacting future net margins and financial performance.

Valuation

• The analysts have a consensus price target of IDR4876.762 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 IDR6300.0, and the most bearish reporting a price target of just IDR3600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be IDR241781.2 billion, earnings will come to IDR71559.6 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 12.3%.
• Given the current share price of IDR3710.0, the analyst price target of IDR4876.76 is 23.9% 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.