NPL ratio is expected to fall 3%.
After a significant kitchen-sinking exercise in 2016, credit costs have been normalising faster than expected and are below 3% ytd from 4% in 2016. UOB Kay Hian said Bank Mandiri’s (BMRI) provisions could decline by Rp6t-8t (US$450m-600m) in 2017, bringing earnings close to Rp18t-20t (US$1.3b-1.5b) (or close to 2015 earnings of Rp20t).
Catalysts such as an earnings recovery, tax amnesty, investment upgrades and valuation have already been priced in. Catalysts such as an earnings recovery, tax amnesty, investment upgrades, attractive valuation and necessary portfolio positioning have already been priced in.
Here's more from UOB Kay Hian:
However, the double-digit earnings growth in 2018-19 might not have been priced in yet as the stock prices of the Big 4 rose at similar rates on the same catalysts. We think: a) mid-teens, double-digit earnings growth potential over the next 2-3 years, and b) NPL ratio possibly falling below 3% by 2019, could support a higher share price trend at BMRI.
NPL could drop close to 3% in 2018. In our view, the 4% NPL level of 2016 reflects a combination of some real asset quality problems (hidden bad loans), restructuring and kitchen sinking. With management maintaining an aggressive approach towards tackling NPLs either by write-offs, restructuring and recoveries, NPL ratio could drop closer to 3% and credit costs could stabilise below 2.5% from 3.9% in 2016.
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