Bank Jago (ARTO.IJ IDR 2,650 BUY.TP IDR 6,600) Improving credit quality, profits to follow

Stock Code	Last Price	Change	Change %
MFIN	4,600	920	25.00%
DCII	167,400	650	0.39%
GGRM	10,225	375	3.81%
FORU	1,690	335	24.72%
LIFE	6,600	300	4.76%
JSMR	4,590	250	5.76%
UNVR	1,725	230	15.38%
INKP	5,275	225	4.46%

Bank Jago (ARTO IJ)

Improving credit quality, profits to follow

ARTO booked net interest income (NII) of IDR 410 billion in 2Q23 (+26% y-o-y, -3% q-o-q). NIM declined to 10.2% (2Q22/1Q23: 10.5%/11.0%) due to the combination of a lower LDR, lower yield, and higher CoF. In 1H23, NII reached 47% of our FY23F, i.e., inline. We maintain our BUY call with an unchanged TP of IDR6,600.

In-line 2Q23 result, expecting better profitability going forward. Including the IDR 5 billion ESOP costs occurred in June, ARTO’s net profits came in at IDR 23 bn in 2Q23 (+131% y-o-y, +31% q-o-q), forming 41% and 36% of our FY23F and the consensus. As we expect continuously higher q-o-q net profits, we believe the 2Q23 results are still inline to achieve our FY23 forecast. We have yet to incorporate the future ESOP costs of IDR 5 billion per month in our financial model.

Credit quality continues to improve. NPLs declined to 1.2% in 2Q23 from 1.5% in 1Q23, a steady improvement from the peak in 2Q22. This is in-line with the company’s intention to keep NPLs below 2%. The cost of credit (CoC) declined to 4.7% in 2Q23, lower than 5.3% in 1Q23 and 6.4% in 2Q22, thanks to the improving credit quality. With high NPLs coverage due to the higher provisions and the improving NPLs ratio in past quarters, we believe the CoC can remain below 5% in 2H23, or better than the previous management`s expectation of 5-5.5%. LaR increased to 8.6% in 2Q23 (from 7.3% in 1Q23) but remained below the industry level of c. 10%.

Slight decline in NIM. NIM declined to 10.2% (2Q22/1Q23: 10.5%/11.0%) due to the combination of a lower LDR, lower yield, and higher CoF. The lower yield reflects a smaller contribution from its Syariah financing which typically carries higher yields and a higher contribution from GOTO which typically has lower yields. The CoF rose to 3.5% in 2Q23 from 2.8% in 1Q23 due to the rising benchmark rate. The management has provided guidance for a plateauing CoF going forward unless BI opts for more rate hikes.

Maintain BUY, ARTO is our top pick in the sector. Although the share price has increased by almost 30% since early May to currently stand at c. 4.4x FY23F PBV, we continue to like the stock given its growth outlook and robust credit scoring system. We maintain our TP at IDR6,600 which is based on three-phase DDM with LTG of 8%, ROE of 18.5%, and ke of 11%. Risks to our view are lower-than-expected loans growth and deteriorating credit quality.