Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Solid Result, But Challenges Ahead: Bank Central Asia (BBCA.IJ) [BCA] reported 2Q21 results of IDR 7.4 tn, improving IDR 376 mn (5.3%) on a linked quarter basis. BCA’s positive operating results were highlighted by non-interest income growth and a decline in operating expenses; and*Credit Challenges Persist, As Credit Break Re-Accelerates: By our calculation, we find that 2Q21 net new NPLs amounted to IDR 2.4 tn for an annualized rate of increase of 92.4%, comparing very unfavorably with 1Q21’s IDR 742 bn and 28.7%, respectively. Despite the recent acceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio. Although, we worry the softness in current macro conditions.

*Solid Result, But Challenges Ahead: Bank Central Asia (BBCA.IJ) [BCA] reported 2Q21 results of IDR 7.4 tn, improving IDR 376 mn (5.3%) on a linked quarter basis. BCA’s positive operating results were highlighted by non-interest income growth and a decline in operating expenses; and*Credit Challenges Persist, As Credit Break Re-Accelerates: By our calculation, we find that 2Q21 net new NPLs amounted to IDR 2.4 tn for an annualized rate of increase of 92.4%, comparing very unfavorably with 1Q21’s IDR 742 bn and 28.7%, respectively. Despite the recent acceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio. Although, we worry the softness in current macro conditions.

Bank Central Asia – Good, But New Credit Challenges Ahead

*Improved Operating Result: Bank Central Asia (BBCA.IJ) [BCA] reported 1Q21 results of IDR 7.0 tn do not do BCA justice, as core operating results grew IDR 1.5 tn (40.9%) over the same period. BCA’s positive operating results were highlighted by two factors: a) interest income growth of IDR 385 mn (2.8%) due largely to a bit of leverage in the corporate securities portfolio, and b) a tax rate reduction; and*Credit Challenges Persist, But Credit Break Decelerates: By our calculation, we find that 1Q20 net new NPLs amounted to IDR 742 bn for annualized rate of increase of 28.7% - which is quite favorable compared to 4Q20 results of IDR 1.3 tn and 46.5%. Given the surprise deceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio.

*Improved Operating Result: Bank Central Asia (BBCA.IJ) [BCA] reported 1Q21 results of IDR 7.0 tn do not do BCA justice, as core operating results grew IDR 1.5 tn (40.9%) over the same period. BCA’s positive operating results were highlighted by two factors: a) interest income growth of IDR 385 mn (2.8%) due largely to a bit of leverage in the corporate securities portfolio, and b) a tax rate reduction; and*Credit Challenges Persist, But Credit Break Decelerates: By our calculation, we find that 1Q20 net new NPLs amounted to IDR 742 bn for annualized rate of increase of 28.7% - which is quite favorable compared to 4Q20 results of IDR 1.3 tn and 46.5%. Given the surprise deceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio.

Bank Central Asia – Light At The End Of The Tunnel

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

With the current account in surplus in 2H 2020, and inflation below BI's 2-4% target for 9 months, we expect the policy rate to decline by 50bp over the next half year, spurring a strong above-consensus rebound to 6.7% real GDP growth. Structural reforms that have made the labour-market more flexible and created an equity-funded vehicle to expedite infrastructure investment, will contribute to the economic acceleration, as will the spill-over from 2020's unspent fiscal stimulus, and this year's continued fiscal accommodation. With inflation well below BI's agreed target range of 2-4% for 9 consecutive months (and the real policy rate above +2% for the past 10 months), we expect BI to cut its policy rate by 25bp each in the next two quarters, to an all-time low of 3% by September 2021. This will spur a strong economic rebound. Aided by the low-base effect (especially in 2Q), we expect Indonesia's real GDP to accelerate to 6.7% growth in 2021. In 1Q 2021, real GDP is likely to have grown 4.5% YoY, led by a strong export rebound, but a sharp acceleration is likely in the rest of 2021, with the past year's structural reforms also helping.  Those reforms have substantially reduced the severance compensation employers are required to pay laid-off employees, thereby making the labour-market much more flexible, and aiding Pres. Jokowi's job creation agenda, which depends crucially on spurring FDI inflows. With the current account in surplus during 2H 2020, and FDI inflows up 5.5% YoY, foreign reserves have rebounded in the past 3 months (to US$138.8 billion, or 10 months import cover). While there will still be some downward pressure on the IDR when interest rates decline (given the large proportion of foreign ownership of local bonds), mild depreciation in the early stages of an economic recovery is unlikely to deter BI. The 7-day moving average of new Covid cases peaked at a 7-day moving average of 12,476 on 2nd February and has since moderated to 5174 by 27 March 2021, allowing the economy to resume functioning more normally. Large fiscal packages worth an additional 4.4% of GDP were announced last year, after the constitutional ceiling on annual fiscal deficits was temporarily raised (from 3% of GDP). But past experience suggests that actual spending will spill-over into 1H 2021 (even with the deficit for this year programmed to decline to 5.9% of GDP, and the extra spending cut to 2.1% of GDP). The Nusantara Investment Authority (NIA), created as part of the structural reforms and funded mainly by foreign, private and government equity (rather than debt) will contribute to accelerating the pace of infrastructure investment.  With the economy likely to grow much faster than consensus expectations, we are bullish on Indonesian equities, particularly large banks like <a href="https://www.smartkarma.com/entities/bank-central-asia-tbk-pt" target="_blank" data-smartkarma-citation="entities:440:1" rel="noopener">Bank Central Asia (BBCA IJ)</a>.

With the current account in surplus in 2H 2020, and inflation below BI's 2-4% target for 9 months, we expect the policy rate to decline by 50bp over the next half year, spurring a strong above-consensus rebound to 6.7% real GDP growth. Structural reforms that have made the labour-market more flexible and created an equity-funded vehicle to expedite infrastructure investment, will contribute to the economic acceleration, as will the spill-over from 2020's unspent fiscal stimulus, and this year's continued fiscal accommodation. With inflation well below BI's agreed target range of 2-4% for 9 consecutive months (and the real policy rate above +2% for the past 10 months), we expect BI to cut its policy rate by 25bp each in the next two quarters, to an all-time low of 3% by September 2021. This will spur a strong economic rebound. Aided by the low-base effect (especially in 2Q), we expect Indonesia's real GDP to accelerate to 6.7% growth in 2021. In 1Q 2021, real GDP is likely to have grown 4.5% YoY, led by a strong export rebound, but a sharp acceleration is likely in the rest of 2021, with the past year's structural reforms also helping.  Those reforms have substantially reduced the severance compensation employers are required to pay laid-off employees, thereby making the labour-market much more flexible, and aiding Pres. Jokowi's job creation agenda, which depends crucially on spurring FDI inflows. With the current account in surplus during 2H 2020, and FDI inflows up 5.5% YoY, foreign reserves have rebounded in the past 3 months (to US$138.8 billion, or 10 months import cover). While there will still be some downward pressure on the IDR when interest rates decline (given the large proportion of foreign ownership of local bonds), mild depreciation in the early stages of an economic recovery is unlikely to deter BI. The 7-day moving average of new Covid cases peaked at a 7-day moving average of 12,476 on 2nd February and has since moderated to 5174 by 27 March 2021, allowing the economy to resume functioning more normally. Large fiscal packages worth an additional 4.4% of GDP were announced last year, after the constitutional ceiling on annual fiscal deficits was temporarily raised (from 3% of GDP). But past experience suggests that actual spending will spill-over into 1H 2021 (even with the deficit for this year programmed to decline to 5.9% of GDP, and the extra spending cut to 2.1% of GDP). The Nusantara Investment Authority (NIA), created as part of the structural reforms and funded mainly by foreign, private and government equity (rather than debt) will contribute to accelerating the pace of infrastructure investment.  With the economy likely to grow much faster than consensus expectations, we are bullish on Indonesian equities, particularly large banks like Bank Central Asia (BBCA IJ). 

Indonesia: More Rate Cuts to Spur Recovery After Recent Structural Reform

Bank Tabungan Negara Persero / Equity Bottom-Up

*Good Number: Bank Tabungan Negara (BBTN.IJ) [BBTN] reported 4Q20 bottom-line result of IDR 482 bn, increasing IDR 130 bn (36.9%) linked quarter. On an operating basis excluding gains (assumed in 4Q20), we calculate results improved even further – increasing IDR 98 bn or 47.3% linked quarter; and*Credit Outlook Brightens: We were also quite pleased to see that net new NPLs too have decelerated and now amount to IDR 240 bn or just 8.2% on an annualized basis. Given the deceleration of net new NPLs, mix of loans, and the strong reserve cover, BBTN’s reserves appear to right where they need to be.

*Good Number: Bank Tabungan Negara (BBTN.IJ) [BBTN] reported 4Q20 bottom-line result of IDR 482 bn, increasing IDR 130 bn (36.9%) linked quarter. On an operating basis excluding gains (assumed in 4Q20), we calculate results improved even further – increasing IDR 98 bn or 47.3% linked quarter; and*Credit Outlook Brightens: We were also quite pleased to see that net new NPLs too have decelerated and now amount to IDR 240 bn or just 8.2% on an annualized basis. Given the deceleration of net new NPLs, mix of loans, and the strong reserve cover, BBTN’s reserves appear to right where they need to be. 

*Weak 4Q20: Bank Central Asia (BBCA.IJ) [BCA] reported 4Q20 results of IDR 7.1 tn, declining IDR 699 bn (9.0%) on a linked quarter basis. Worse yet, when we exclude various non-core items, core operating results declined IDR 4.6 bn (55.5%) over the same period. Results at BCA were highlighted by negative operating jaws; and  *Credit Challenge, But Modest Earnings Event: By our calculation, we find that 4Q20 net new NPLs amounted to IDR 1.3 tn for an annualized rate of increase of 46.5% - rivaling some of the worst Indian banks. Given the continued breakdown in credit quality which shows no signs of abating, we calculate that reserves are short close to IDR 3.5 tn or about 50% of 4Q20 PBT – which is de minimis relative to the sector and region.

*Weak 4Q20: Bank Central Asia (BBCA.IJ) [BCA] reported 4Q20 results of IDR 7.1 tn, declining IDR 699 bn (9.0%) on a linked quarter basis. Worse yet, when we exclude various non-core items, core operating results declined IDR 4.6 bn (55.5%) over the same period. Results at BCA were highlighted by negative operating jaws; and  *Credit Challenge, But Modest Earnings Event: By our calculation, we find that 4Q20 net new NPLs amounted to IDR 1.3 tn for an annualized rate of increase of 46.5% - rivaling some of the worst Indian banks. Given the continued breakdown in credit quality which shows no signs of abating, we calculate that reserves are short close to IDR 3.5 tn or about 50% of 4Q20 PBT – which is de minimis relative to the sector and region. 

Bank Central Asia – Poor Showing At Indo Bellweather

Indonesia

iShares MSCI Indonesia ETF is an exchange-traded fund incorporated in the USA. The ETF seeks investment results that correspond to the performance of the MSCI Indonesia Investable Market Index.

iShares MSCI Indonesia ETF (EIDO US)

Bank Central Asia – Good, But New Credit Challenges Ahead

BANK CENTRAL ASIA: BCA reported a 5.3% QOQ 2Q21 results increase. Despite the 92.4% net new NPLs increase, we calculate that loss reserves are...

Thomas J. Monaco

Bank Central Asia – Light At The End Of The Tunnel

BANK CENTRAL ASIA: BCA's core operating results grew 40.9% QOQ in 1Q21, and were highlighted by interest income growth and lower taxes. Another...

Thomas J. Monaco

Indonesia: More Rate Cuts to Spur Recovery After Recent Structural Reform

With inflation below BI's 2-4% target for 9 months, we expect 50bp of further rate cuts. That, coupled with fiscal stimulus & structural reform,...

Prasenjit K. Basu

Bank Tabungan Negara – Well Managed

BANK TABUNGAN NEGARA: BBTN reported 4Q20 bottom-line result which increased 36.9% linked quarter. Net new NPLs too have decelerated at just 8.2% on...

Thomas J. Monaco

Bank Central Asia – Poor Showing At Indo Bellweather

BANK CENTRAL ASIA: BBCA reported 4Q20 results decline of 9.0% linked quarter. Results at BCA were highlighted by negative operating jaws. Net new...

Thomas J. Monaco