Bank Neo Commerce (BBYB IJ)

Higher provisions from deteriorating credit quality

BBYB reported substantial net losses of IDR 258 billion (+33% y-o-y, +4-fold q-o-q) due to high provisions of IDR 653 billion (+4-fold y-o-y, +23% q-o-q) which were driven by its deteriorating credit quality. The higher NPLs of 3.7% in 2Q23 (2Q22/1Q23: 1.8/3.5%) hit the loans growth which stood at -7% q-o-q. Maintain BUY with a lower TP of IDR 700.

Efficiencies maintained, dragged down by higher provisions. BBYB booked net interest income (NII) of IDR 561 billion in 2Q23 (+114% y-o-y, -2% q-o-q). NIM remained robust at 13.7% in 2Q23 (2Q22/1Q23: 9.7%/13.8%) on the back of the high loan yield at 27.0%. In 1H23, NII reached 58% of our FY23F and the opex only reached 28% resulting in PPOP that exceeded our FY23 forecast. Net profits, however, came in at negative IDR 327 billion, 68% of our FY23 figure and 164% of the consensus due to the high provisions of IDR 653 billion.

Higher NPLs, provisions, and NPL coverage. The high provisions drove the CoC up to 24.9% in 2Q23 (2Q22/1Q23: 10.3%/20.2%). This reflects the increase in NPLs to 3.7% in 2Q23 from 3.5% in 1Q23, double the 2Q22 NPLs of 1.8%. The good news is that the high provisions bring the bank’s NPL coverage ratio to 96% in 2Q23 (up from 71% in 1Q23) reaching the management`s target. As such, we can expect better profitability in 2H23. The company expects NPLs to plateau in 2H23.

Declining loan balances, deposit growth remain on track. We believe the deteriorating credit quality also contributed to the weaker loans balance, which declined 7% q-o-q (yet still 44% higher y-o-y). This prompted the management to reduce its loans growth target from c. 40% to 18-20% for FY23F. Customer deposits were still reported higher q-o-q (+3%), reaching IDR15.2 trillion. However, as with the case of Seabank, there is a risk of declining deposits in 2H23. Fortunately, Neobank users grew more than we anticipated, reaching 23.9 million at the end of Jun-23.

Maintain BUY, TP: IDR700. We change our forecasts while maintaining our valuation using the dividend discount model based on a long-term cost of equity of 11.0% and long-term growth of 8.0%. We are still expecting a huge improvement in 2024 but postponing the positive bottom line to FY25F (from FY24F). Our new TP of IDR700 implies 2.7x/3.0x FY23F/FY24F P/BV. Risks to our view are declining deposit balances and persistently high NPLs.