See how Bank Negara Indonesia has improved after its 4-year transformation phase

BNI now has 1,447 outlets from only 939 in 2009.

According to Barclays, Bank Negara Indonesia (BNI) has completed a transformation phase that it expects to result in improved profitability. Since 2009, BNI has been investing in expanding its network, cleaning up its balance sheet and strengthening its credit and sales & service processes.

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During this phase, its cost growth rate has been high and balance sheet growth rate relatively modest. Going forward, we believe BNI should be able to accelerate balance sheet growth and moderate its cost growth by reaping the benefits of prior investments, thereby improving its profitability.

Furthermore, BNI appears well placed from a funding and liquidity perspective. In our view, improved profitability should lead to a re-rating of the shares. We initiate with an Overweight rating based on our 12-month price target of Rp5,100.

Rebuilding and investment phase coming to end
Since 2009, BNI has been investing in expanding its network, cleaning up its balance sheet and strengthening its credit and sales & service processes. BNI expanded its network from 939 outlets (Dec-09) to 1,447 outlets (Sep-12). It also managed to bring down its gross non-performing loans (GNPLs) to 3.5% in 2011 from 8.5% in 2007.

Furthermore, it has increased its remedial and recovery efforts, which have led to significant realization of the recovery of loans that had been written-off before 2010.

To maintain its asset quality in the medium-sized corporate segment BNI’s growth focus is now selective to only leading regional players in Indonesia in eight prioritized sectors.

Expect credit growth to pick up and operating cost growth to moderate
During its transition period, BNI slowed its growth to focus on improving asset quality. With greater confidence in its credit processes, credit growth is picking up again. We expect the growth in operating expenditures to moderate from a 21% CAGR for the past two years to11% for 2013-14E.

Well placed from funding and liquidity perspectives
BNI’s funding has improved as a result of investment in its network. Its CASA growth has picked up and has been above the system CASA growth since 2011. Its CASA ratio now stands at 65% as of Sep-12, improved from 59% in 2010. Its LDR is also low at 79% (as of Sep-12). This should allow it to grow credit faster than deposits.