Bank BTPN Syariah (BTPS.IJ Rp 1,215; HOLD TP Rp 1,300) NPL Cycle Hits Bottom, A Long Road to Recovery Ahead; Re-initiate with a Hold Rating

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Bank BTPN Syariah (BTPS IJ)

NPL Cycle Hits Bottom, A Long Road to Recovery Ahead; Re-initiate with a Hold Rating

BTPS’s NPL cycle has peaked, but we expect the recovery to be gradual, resulting in slow ROE improvement in FY24-26F.
We see downside risk from potential disappointment in 4Q24, while low fund position might serve as support to the share price.
We re-initiate coverage on BTPS with a Hold rating and a TP of Rp1,300 based on an iCoE of 11.6% (-1SD), LTG of 3%, and FY24F ROE of 11.5%.

Valuation re-rating may remain hindered by lingering asset quality issue

Pre-pandemic, BTPS’s valuation earned a premium (average PBV of 4.0x in 2019) due to its compelling business model, i.e., ultra-micro women group-based lending, which not only had a high social impact but was also high-yielding and supported by robust asset quality. Post-pandemic, the bank faces issues with increasing moral hazard among its borrowers. Hence, despite maintaining its social score and high yield, it loses its edge in asset quality, resulting in a valuation de-rating (average PBV of 1.0x in YTD24). As we believe the current issue will take time to be resolved, we do not foresee valuation re-rating in the near future.

Expecting gradual recovery in the asset quality

The bank is still facing issues with its asset quality, as shown by the NPL ratio of 3.1% in 2Q24 (2Q23: 3.0%) and higher write-offs of Rp500bn per quarter in 1H24 (FY23 average write-off at Rp375bn). As the bank’s business model relies heavily on customer behavior, and given the current economic conditions, we believe it will be challenging to return to the success achieved before the pandemic.

Persistent high CoC might result in 4Q24 disappointment

Consensus analysts forecast net profit growth of 8.0% for FY24. However, we believe the consensus’ provisions of Rp1.3tr (CoC of 11.4%) are too low, given that 8M24 bank-only provisions have already accounted for 79% of the FY24C provisions. Based on our FY24 loan assumption, to meet the consensus target, BTPS would need a CoC of 7.0% for the remainder of the year. Consequently, we anticipate a risk of a downgrade in the consensus’ bottom line.

Re-initiate with a Hold rating and a TP of Rp1,300

Amid low positioning by both local and foreign funds, we re-initiate our coverage on BTPS with a Hold rating and a TP of Rp1,300, derived using the inverse CoE (-1SD of its 2-year average) in the GGM model, with an 11.6% CoE, 11.5% FY25F ROE, and 3% LTG, resulting in a fair value PBV of 1.0x to its FY25F BV/share of Rp1,324. Upside risks include improved asset quality and lower-than-expected CoC, while downside risks involve further asset quality deterioration.

… Read More 20241001 BTPS