BJBR: Banking

The Company

Established in 1961, Bank Pembangunan Daerah Jabar Banten (BJBR) was the first district development bank, known as Bank Karja Pembangunan Daerah Djawa Barat. In 1992, the bank changed its legal status to become a foreign exchange commercial bank, with limited scope for operations in the East Java and Banten regions.

Following its IPO of 2.4bn new shares, which raised approximately Rp1.5trn ($150m) in July 2010, BJBR is currently owned by several local governments: the West Java provincial government (with a 38% stake), Java regency government (18%), Banten regency (6%), Java city government (6%), Banten provincial government (5%) and Banten city government (2%) while the public controls the remaining 25%. The bank is currently monitored by five commissioners, namely Ir H Muhadi, Achmad Baraba, Klemi Subiyantoro, Yayat Sutaryat and Rudhyanto Mooduto.

It is managed by a team of professionals with extensive experience and knowledge in the sector headed by Bien Subiantoro as the bank’s president director. BJBR has laid its long-term strategic move from a regional to a leading national bank. The two principal objectives of geographical diversification are to overcome limited growth opportunities in the regional market and to increase its competitive edge amidst an intensifying business environment. The bank has diversified its geographical presence by opening branches in several locations outside East Java, including in Jakarta, Semarang, Surabaya, Medan and Batam over the past few years, bringing its total number of units in the third quarter of 2013 to 413 (62 branches, 304 sub-branches and 47 forex branches). The bank is also well supported by 152 cash offices and 106 payment points. Some 1052 ATMs have been in operation on top of the 49,000 “Bersama” ATMs spread across the archipelago.

Development Strategy

BJBR, the largest regional bank by assets under our coverage, plans to focus on consumer lending, primarily in its captive civil servant market. Consumer loans are backed by employee payrolls with superior assets quality, enabling BJBR to maintain its consumer loan gross NPL at below 50 bps.

Increased competition in this segment has forced BJBR to compete in pricing in the hope of maintaining the bank’s strong presence in loans to civil servants while continuing to preserve its above-average industry growth. In addition to consumer loans, BJBR carries exposure in commercial, micro and mortgages, which altogether account for the remaining 36% of its loan portfolio mix. Unfortunately, its aggressive penetration in the micro segment, currently only around 8% of loan portfolio, via “waroeng BJB” (small outlets) in the past few years has ballooned gross NPLs, which reached nearly 9.0% and resulted in the management reviewing its strategic move in boosting high-yielding loans.

We believe a more prudent expansion and credit control are likely to slowdown its micro loan growth ahead.

Forecast

BJBR’s margin pressure arising from competitive leading pricing and the higher cost of funding would be offset by continued growth in consumer loans and an improved credit risk profile ahead. Apart from its competitive lending rate, increased civil servants’ wages, higher credit ceiling and longer credit tenure should allow BJBR’s consumer loans to continue growing, allowing its bottom line to move at least in line with the industry average. Expected improvement in its credit risk profile has resulted in limited provisioning that would consequently support bottom-line growth.

For the years 2014 and 2015, we project BJBR’s EPS growth to be 11-12%, allowing the bank to produce ROAE of around 22%. This should result in the bank’s continued high dividend payout as part of its corporate dividend policy. Note that the bank declared a 2012 DPS of Rp68 ($0.007), or equivalent to 8.2% yield.

Similarly, we would expect generous yields to materialise in BJBR’s 2013 books. Concurrently, the shares are currently trading at the undemanding 2014 P/BV of only 1.1x vis-à-vis the industry’s average valuation of 2.1x. Based on 2014 P/E, BJBR is also attractive on 5.1x vis-à-vis the industry’s average valuation of 10.1x.