Period  3Q14/9M14

Actual vs. Expectations Bank Internasional Indonesia (BII) reported a weak set of results where 9M14 earnings plunged 69% YoY.

Dividends  No dividends were declared.

Key Results Highlights

9M14 vs. 9M13, YoY

 The sharp decline in PAT (-69%) can be attributed to: (i) mediocre income growth (+4%), (ii) higher opex (+15%), and (iii) higher loan loss provision (+153%).

 Net interest margin (NIM) fell 43bpts on the back of rising cost of funds.

 Loan-to-deposit ratio (LDR) surged to 94% (+5ppts) as loan grew at a faster clip vs. deposit at 14% and 7%, respectively. To note, loan growth so far is below management’s target of +16-17% for FY14.

 With an elevated opex (due to a sharp increase in general and administrative expenses in 2Q14), cost-to income ratio (CIR) spiked up to 65% (+2ppts).

 Asset quality continues to slide given that: (i) gross impaired loan ratio increased to 2.5% (+78bpts), (ii) loan loss coverage dropped to 48% (-20ppts), and (iii) credit charge ratio rose to 2% (+1ppts).

 Annualised ROE fell to 3.5% (-10ppts) while regulatory capital ratios were stable.

3Q14 vs. 2Q14, QoQ

 Earnings declined 98% as: (i) income contracted (-8%) while (ii) loan loss provision increased (+107%).

 NIM fell 45bpts due to rising cost of funds.

 LDR was flat at 94% as loan and deposit declined in tandem (-2%).

 CIR fell 9ppts given stricter cost management.

 Credit charge ratio increased to 3.1% from 1.5%, signaling a slight deterioration in asset quality.

Outlook  Intense competition for deposits will continue to compress NIM as funding cost increases.

 Rising inflation along with higher cost of borrowing may further exert pressure on asset quality.

 Loans growth may be tepid going forward given uncertainties on the country’s policies as businesses and consumers adopt the wait-and-see approach before investing into the future.

Change to Forecasts

 No change to our forecasts as BII’s contribution to overall Group’s PBT is immaterial (~5%).

Rating Maintain OUTPERFORM

Valuation  TP of RM11.20 based on 1.9x FY15 P/B is unchanged. This is in-line with its 3-year average historical P/B.

 We continue to like Maybank for its inexpensive valuation vs. domestic peers coupled with its decent dividend yields of 5%-6%.

Risks to Our Call

 Further margin squeeze from tighter lending rules and stronger-than-expected competition.

 Slower-than-expected loan growth and deterioration in asset quality.

 Rising credit charge as result of an up-cycle in NPL.

 Further slowdown in capital market activities.

 Unfavourable regulatory changes.

 Adverse currency fluctuations.

Source: Kenanga