Period  2Q14/1H14

Actual vs. Expectations Bank Internasional Indonesia (BII) reported 1H14 PAT of IDR336b (-51% YoY).

 Deterioration in asset quality was the primary reason for its subpar showing. Furthermore, weak macroeconomic environment was another contributing factor.

Dividends  No dividends were declared.

Key Results Highlights

1H14 vs. 1H13

 BII’s tepid bottomline (-51% YoY) was dragged by slower NII growth (+5% YoY) and higher provisioning on NPL (+117% YoY).

 NIM fell by 56bps YoY on the back of tight liquidity environment.

 Cost-to-income ratio climbed 3ppts YoY to 69% given the sharp increase in general & administrative expenses (+18% YoY).

 Gross impaired loans spiked up to 2.7% (+1.3ppts YoY) while cost of credit increased by 0.6ppts YoY to 1.5%. Worryingly, loan loss coverage fell to 48% from 86%, suggesting room for further provisioning on NPL.

 LDR increased 6ppts YoY as loans grew at a quicker pace than deposits.

 Annualised ROE was trimmed to 5.3% from 13.7% while regulatory capital ratios were maintained.

2Q14 vs. 1Q14

 Quarterly PAT fell 22% QoQ on the same reasons mentioned above.

 NIM was flat QoQ (+11bpts).

 Cost-to-income ratio increased 3ppts QoQ to 71%.

 Asset quality continued to dip as gross impaired loans contracted 0.7ppts QoQ while cost of credit ticked up by 0.1ppts QoQ. Furthermore, loan loss coverage fell 8ppts QoQ.

Outlook  Rising interest environment likely to persist in 2H14 as inflationary pressure heightens – NIM compression from higher cost of funds.

 Loans growth may be tepid going forward given uncertainties on the country’s policies with its newly formed government.

 BII’s cost of credit may continue to rise given that its 1H14 loan loss coverage is low at 48% vs. 1H13 of 86%.

Change to Forecasts

 No change to our forecasts. However, the risk of a downgrade exists judging from BII’s weak set of results.

Rating Maintain OUTPERFORM.

Valuation  TP of RM11.20 is maintained, pending its forthcoming results announcement. This is derived based on a blended average of 1.9x FY15 PBV & 13.5x FY15 PE.

Risks to Our Call

 Tighter lending rules and further margin squeeze.

 Macroeconomic slowdown in respective operating countries.

Source: Kenanga