The Cost of Being Everyone's Bank
Bank Rakyat Indonesia is majority state-owned (the government of Indonesia held 56.75% as of this quarter) and built its business on a branch and agent network reaching into towns and villages no digital-first or purely urban bank bothers with, lending to MSME» borrowers (called UMKM in Indonesia - Usaha Mikro, Kecil, dan Menengah) that a leaner, cheaper-funded competitor like Bank Central Asia mostly leaves alone. That reach isn't free: it's funded by a deposit base that leans much more heavily on costlier time deposits than a transaction-banking-led private bank's does, which is why BRI's margins have always had to work harder for the same profit dollar. This quarter is a live test of that trade-off - can BRI's MSME lending engine keep outrunning its more expensive funding cost, or does the margin start giving back what the reach is supposed to earn?
This is BRI's Q1 2015 report (period ended March 31, 2015, board-signed April 30, 2015). Indonesia's economy was decelerating from the commodity-driven growth of the early 2010s, and the currency was still working through the aftershock of the 2013 "taper tantrum" - the mid-2013 emerging-market selloff triggered by the U.S. Federal Reserve signaling it would wind down bond purchases, which hit Indonesia's rupiah and equities especially hard given the country's twin current-account and fiscal deficits at the time.
The headline P&L looks fine: consolidated net income rose 3.5% year-over-year. But underneath it, the loan book actually shrank 3.5% quarter-on-quarter, the loan-to-deposit ratio» fell from 92.01% to 80.47% in a single year, net interest margin» compressed from 9.06% to 7.57%, and return on assets» fell from 5.02% to 3.99%. A bank can grow net income while every one of its core efficiency ratios moves the wrong direction - that's exactly what happened here, and the cash flow statement shows precisely where the difference went: the money that didn't go into new loans this quarter (a Rp15.96 trillion release of cash from the loan book, per the cash flow statement, versus loans actually consuming cash a year earlier) mostly went into buying government bonds and securities instead (a Rp26.86 trillion increase in available-for-sale and held-to-maturity securities, including Government Recapitalization Bonds).
The Prescription
BRI's actual edge is the MSME lending network nobody else has bothered to build at this scale - loans still grew roughly 9.4% year-over-year even in a quarter where the balance sheet paused, which is a modest but real signal that the underlying lending engine keeps working. The bank should keep pushing loan growth back up toward where deposit growth already is, specifically into the MSME/UMKM segment where its distribution is the actual moat, rather than let the loan-to-deposit ratio keep drifting down (it fell from 92% to 80% in a single year) while deposits pile up faster than the bank can profitably lend them out.
What it should stop doing: parking the quarter's paused loan growth in government securities instead of pushing it back into the MSME book. Rp26.86 trillion went into securities purchases this quarter (see The Cost of Being Everyone's Bank above) - a lower-yielding, commodity activity any bank with a balance sheet can do, and a strange place to park cash for an institution whose entire reason for a premium valuation is underwriting judgment on borrowers other banks can't reach. Every rupiah sitting in a government bond instead of a microloan is BRI competing on a dimension where it has no real edge.
Key Financial Metrics
Q1 2015 vs. Q1 2014 (P&L), and Mar 2015 vs. Dec 2014 (balance sheet) - consolidated
FX: IDR 13,074.00 = USD 1 (March 31, 2015 close, per the filed statement's own disclosed rate).
| Metric | Q1 2015 (IDR) | Q1 2015 (USD) | Q1 2014 (IDR) | YoY |
|---|---|---|---|---|
| Net Interest Income ("Net Revenue" equivalent) | Rp13,497,335M | ~$1,032M | Rp12,413,082M | ✅ +8.7% |
| Other operating income | Rp2,771,881M | ~$212M | Rp1,850,755M | ✅ +49.8% |
| Other operating expense | Rp8,928,896M | ~$683M | Rp7,456,789M | ⚠️ +19.7% |
| Income from Operations ("Operating Income" equivalent) | Rp7,340,320M | ~$562M | Rp6,807,048M | ✅ +7.8% |
| Net Income (attributable to owners) | Rp6,143,390M | ~$470M | Rp5,935,165M | ✅ +3.5% |
| Total comprehensive income (attributable to owners) | Rp5,489,691M | ~$420M | Rp6,201,039M | ⚠️ -11.5% |
| EPS | Rp249.03 | ~$0.0191 | Rp240.59 | ✅ +3.5% |
| Balance sheet metric | Mar 2015 (IDR) | Mar 2015 (USD) | Dec 2014 (IDR) | QoQ |
|---|---|---|---|---|
| Total Assets | Rp806,005,078M | ~$61.7B | Rp801,955,021M | ➖ +0.5% |
| Loans and receivables | Rp477,889,216M | ~$36.6B | Rp495,104,644M | ⚠️ -3.5% |
| Total Deposits (Demand + Savings + Time) | Rp593,412,889M | ~$45.4B | Rp605,610,330M | ⚠️ -2.0% |
| Total Liabilities | Rp709,906,085M | ~$54.3B | Rp704,275,770M | ➖ +0.8% |
| Total Equity | Rp96,098,993M | ~$7.35B | Rp97,679,251M | ⚠️ -1.6% |
| Total Cash and Cash Equivalents (per cash flow statement) | Rp183,029,232M | ~$14.0B | Rp172,731,255M | ✅ +6.0% |
Total cash and cash equivalents, which the filed cash flow statement discloses directly, is shown above in place of free cash flow.
Total equity actually fell 1.6% quarter-on-quarter, not grew - the opposite of the net-income line. The dominant reason is a Rp7,272,495M dividend (Bank-level, per the filed statement's own P&L page) distributed during the quarter, which by itself outweighed this quarter's Rp5,489,691M of total comprehensive income attributable to owners. A secondary drag came from other comprehensive income: a Rp1,091,538M actuarial loss on the bank's defined-benefit pension program this quarter, versus a Rp93,231M actuarial gain the same quarter a year earlier - a real, disclosed swing, but a smaller factor than the dividend payout in explaining why equity moved the opposite direction from net income.
A bank whose net income rose while its loan-to-deposit ratio, net interest margin, and return on assets all fell in the same year isn't necessarily in trouble - but it is telling you where to look first before believing the headline number.
Key Operational Metrics
- CASA» ratio: 51.4% (Demand deposits Rp85,527,891M + Savings deposits Rp219,504,099M, against total deposits of Rp593,412,889M, consolidated) - noticeably lower than Indonesia's cheapest-funded private banks, which typically run CASA well above 70%; BRI's MSME reach comes funded by relatively more time deposits, not a cheap transaction-banking float.
- Loan-to-deposit ratio (LDR): 80.47% (Bank, Mar 2015) vs 92.01% (Bank, Mar 2014) - a sharp year-over-year drop, consistent with deposits growing faster than the loan book could absorb.
- Net Interest Margin (NIM): 7.57% (Bank, Mar 2015) vs 9.06% (Bank, Mar 2014) - down 149 basis points YoY.
- ROA»: 3.99% (Bank, annualized per the company's own ratio calculation) vs 5.02% a year earlier.
- ROE»: 29.84% (Bank, annualized) vs 30.97% a year earlier - still very high, only slightly down.
- CAR» (capital adequacy): 20.08% (Bank) vs 18.18% a year earlier - comfortably above the regulatory minimum, and the one core ratio that actually improved.
- NPL» ratio - gross: 2.17% (Bank) vs 1.78% a year earlier.
- NPL ratio - net: 0.60% (Bank) vs 0.47% a year earlier.
- Cost-to-income ratio (BOPO, its Indonesian regulatory name): 68.04% (Bank) vs 62.96% a year earlier - worsened, meaning it now costs more to generate each rupiah of operating income than it did a year ago.
- Not available this quarter: no presentation deck, press release, or transcript was located for this quarter, so branch/agent network counts, e-channel transaction volumes, and any MSME-specific loan-growth commentary beyond the filed statement's own line items aren't disclosed.
A seasonal note worth keeping in mind when reading the quarter-on-quarter loan contraction: Indonesian bank loan books commonly pull back in the first calendar quarter after a fourth-quarter disbursement push, and BRI's MSME book in particular carries real agricultural-cycle seasonality (loan demand and repayment tied to harvest timing) - this doesn't explain away the contraction, but it means a single Q1-to-Q1 comparison across future years will be a fairer read than judging this quarter against Q4 2014 in isolation.
Beyond the Usual
Related-party loans show fresh signs of trouble
BRI's own quality-of-assets disclosure shows Rp259,467M of its Non-UMKM related-party Rupiah loan book (Bank-only) classified "doubtful" as of March 2015 - about 29% of that Rp890,526M loan bucket. A year earlier, the entire Rp849,778M related-party Non-UMKM Rupiah book was classified "current," with zero doubtful. This is disclosed data, not evidence of wrongdoing, but a related-party loan bucket moving from fully current to nearly a third doubtful within a year is exactly the kind of trend worth watching in the next few quarters rather than dismissing as noise.
Provisioning still exceeds the regulatory minimum, but the cushion is thinner than a year ago
BRI's actual allowance for impairment of financial assets (Rp16,013,331M, Bank) still exceeds the regulatory-required minimum allowance (Rp14,401,610M, Bank) by about 11.2% as of March 2015 - a real, disclosed buffer above what's required. That cushion was considerably fatter a year earlier, though: Mar 2014's actual allowance (Rp15,432,058M) exceeded its required minimum (Rp11,814,685M) by 30.6%. The bank remains adequately provisioned by its own regulatory measure, but the excess above the floor has shrunk by more than half in relative terms.
State-owned-enterprise lending headroom grew 26% in a single quarter
Unused, uncommitted loan facilities extended to state-owned enterprises (a distinct disclosure category in BRI's commitments and contingencies statement, consolidated) grew from Rp33,069,232M at the end of 2014 to Rp41,672,724M as of March 2015 - a 26.0% increase in undrawn lending capacity to other state-owned companies in a single quarter, notable given BRI is itself majority state-owned.
Off-balance-sheet guarantees issued grew almost 12% quarter-on-quarter
Guarantees issued (Rupiah plus foreign-currency, consolidated) rose from Rp18,853,825M at the end of 2014 to Rp21,061,219M as of March 2015, an 11.7% quarter-on-quarter increase in this off-balance-sheet exposure. This is a normal part of a large bank's trade-finance and guarantee business, not a cause for concern on its own, but it's real contingent exposure that doesn't show up in the on-balance-sheet loan figures above.
Write-offs rose faster than recoveries
Loans written off against earning assets rose 29.5% year-over-year (Rp1,373,138M vs Rp1,060,164M, Bank), while recoveries of previously written-off loans grew a slower 14.6% (Rp453,307M vs Rp395,664M, Bank). Both figures are genuine footnote-level color rather than headline numbers, and directionally consistent with the gross NPL ratio's rise from 1.78% to 2.17% over the same year (see Key Operational Metrics above).
Target Valuation Range
~12.1x P/E, ~3.10x P/B. Bottom line: cheap on this quarter's own numbers - roughly 12x trailing P/E and 3.1x P/B against a Bank-reported ~30% ROE is an attractive combination on paper - but that ROE is being produced by a margin that just compressed 149 basis points and an ROA that fell a full percentage point year-over-year. The multiple is pricing yesterday's margin, not this quarter's direction.
BRI's shares closed at approximately Rp2,413.59 on March 31, 2015 on a post-split basis (public market price on the Indonesia Stock Exchange; converted to Rp12,068 in the nominal terms actually quoted at the time, adjusting for the company's later 1:5 stock split effective November 10, 2017, since price data pulled today for this period reflects that split retroactively). Shares outstanding, computed directly from this quarter's own disclosed figures (net income attributable to owners of Rp6,143,390M divided by disclosed EPS of Rp249.03), come to approximately 24.67 billion (pre-split basis, matching the count that actually existed at the time).
| Market cap → book value | Q1 2015 |
|---|---|
| Share price (period-end, nominal terms) | Rp12,068 |
| Shares outstanding | ~24.67 billion |
| Market capitalization | ~Rp297,637B |
| Book value (total equity attributable to owners) | Rp95,918B |
| P/B | ~3.10x |
| Peer-multiple sanity check | Q1 2015 |
|---|---|
| EPS (annualized, Q1 2015 EPS × 4) | Rp996.12 |
| P/E | ~12.1x |
| Book value per share | Rp3,889 |
| P/B | ~3.10x |
No same-period peer comparison is available yet for this quarter - this is the first post in this backlog, and Indonesia's other large listed bank hasn't been covered for a comparable period yet. A ~12x P/E against a Bank-reported ~30% ROE is arithmetically cheap in isolation (a bank compounding equity at 30% would typically command a materially higher multiple than this), which is exactly what makes this quarter's margin and asset-quality softening worth tracking closely in the quarters that follow - the multiple hasn't caught up to the trend yet, in either direction.
A full DCF isn't included here - one quarter's numbers aren't enough to responsibly model a multi-year loan growth, margin, and cost-of-equity trajectory for a bank, and a fabricated-precision DCF from insufficient data is worse than no DCF. The peer-multiple read above is the honest valuation lens for this quarter.
Two Years Since the Taper Tantrum
BRI's share price (converted to the nominal terms actually quoted at the time, adjusting for the 2017 stock split) moved from approximately Rp8,545 in April 2013 to a trough of approximately Rp6,000 in August 2013 - a roughly 30% drawdown during the taper-tantrum selloff described in The Cost of Being Everyone's Bank above - before recovering to approximately Rp12,068 by the end of March 2015. That's a +41.2% move from the start of the two-year window to its end, and more than a doubling (+101%) from the August 2013 trough to this quarter's close. This is a large enough move to call out on its own: it reflects Indonesian equities broadly recovering from the 2013 EM selloff, helped along by the July 2014 presidential election and the market's initial optimism around the incoming administration's economic agenda, rather than anything specific to this quarter's numbers.
PT Bank Rakyat Indonesia (Persero) Tbk's Q1 2015 consolidated financial statement ("Publication March 31 2015"), the OJK-mandated quarterly bank publication report, board-signed April 30, 2015.