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Bank Rakyat Indonesia:Reduce,Front-loading credit cost into
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Déjà vu: Flashback to the Indian banks two years ago: Indonesianbanks' restructured loans have soared from 1.8% of total loans2013to 5.3% in 2Q17, amid the NPL cycle and Indonesian financialservices authority OJK's (Otoritas Jasa Keuangan) asset quality relaxation.This scenario reminds us of the Indian banks in 2Q15, whentheir restructured loans reached 4.5% of total loans (from 4.0%1Q13), and eventually transformed into NPLs and write-offs in subsequentyears, raising average credit costs by 2.5x.。

Within consensus expectations. 2Q17 PPoP was up 18% y-o-y to IDR12,821bnthanks to a 14% y-o-y increase in total income. Despite this, pre-tax profit was up byonly 4% y-o-y to IDR 8,145bn due to a 63% y-o-y increase in absolute credit cost.

    Negative catalyst from expiration of NPL relaxation: In August2015, OJK relaxed the loan quality requirements from three pillarsone for two years. With this relaxation, Indonesian banks appearedto prefer restructuring their problematic loans instead of recognizingthem as NPLs. As the relaxation has now expired, banks nowneed to catch up on NPL recognition.。

    Although annualized pre-tax earnings are within our full year estimate and 9% belowconsensus, we consider the results to be in-line with market expectations as BBRIhas alluded to credit cost tapering off in 2H17e. BBRI stated that it has been frontloadingcredit cost into 1H17.

    NIM would also fall: The lapse of Indian banks' restructured loansto NPLs also lowered their NIMs from 3.2% to 2.9% in 2013-16, andthe decline could continue. Indonesian banks' NIMs have alreadydeclined from 7.9% in 2016to 7.4% in 1H17– and we believe this is justthe beginning.。

    Slower loan growth but NIM increases. Loan growth slowed with total loans rising12% y-o-y vs. 17% in 1Q17. This could be due to repayments from corporateborrowers. As a result, the loan deposit ratio fell to 90% (1Q17: 93%). NIM increased54bp q-o-q to 8.32%. It is difficult to ascertain what drove this as BBRI released justpresentation slides without any financials at the time of writing. However, we would notbe surprised if this NIM strength was caused by accounting reclassification. BBRI’sNIM has historically been volatile due to accounting changes and reclassifications.

    Loan growth remains a drag: Indonesian banks' loan growth slowedfrom 7.9% YoY in 2016to 7.7% in June 2017, prompting Bank Indonesiato cut its 2017loan growth target from 10-12% to 8-10

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