BBNI - Oversized Provisioning
Rising loan loss reserves allows for reversals, low credit costs
We often look to the change in credit costs to gauge if a bank will be able to see loan loss reversals or low credit costs. This was especially important during mid last year, when it appeared as though banks over-did their provisioning. But it is also important to look at the accumulated loan loss reserves (LLR) on the balance sheet, not only the income statement credit costs. This is because of write-offs, which are a net reduction to LLR.
Indonesia’s Bank Negara Indonesia (BBNI) stands out within Asia and domestically. Its LLR having risen from IDR16.9tr to IDR48.4tr, from FY19 to 1H21. This 186% growth rate is over-sized to say the least, and there are no domestic large banks that compare. In our sample of nearly 30 banks, only tiny PT Bank QNB saw higher growth in LLR. The difference: its NPLs are up tremendously in 1H21; this is not the case for BBNI.
Not only is the reported NPL ratio lower in 1H21 HoH for BBNI, its granular loan data does not suggest worsening credit metrics. Most important is the sizable reduction in substandard loans from FY20 to 1H21, by more than 40% and by nearly IDR4tr. The steady decline of these loans during 1Q21 and 2Q21, suggests that NPL migration from this bucket to doubtful loans or to loss loans is less likely. As such, required provisioning can decline. With a similar rise in special mention loans (SML) there appears to be loan migration upward, which is a positive for credit costs, for the outlook on LLR.
BBNI’s total LLR growth is not only greater than most any bank in Asia-Pacific over this period, but the bank continues to take high impairment costs. It has not yet seen the credit costs decline that has characterized much of global banking. BBNI’s impairment costs/loans are now 3.13% in 2Q21 on an annualized basis. The figure was similarly high at 3.59% during FY20. A more normal level, as seen during the preceding three years, from FY17 to FY19, is 1.15%. There is significant scope for reduction, and a concurrent rise in ROA. This also need not be a single quarter event, but rather BBNI can see loan loss reversals or benign credit costs for several quarters.
Typically, BBNI records impairment costs at 25% to 33% of operating profit, and where the lower end of the range was more normal in more recent years. During 1Q21 and 2Q21, the bank’s impairment costs/operating profit was 58-59% and this compares with 80% during FY20. There is considerable scope for lower credit costs at BBNI, not only when considering one aspect or with respect to one variable. In our bank research, we often look to bank ideas where the theme is multifaceted. It makes for a stronger story, and this is certainly the case for BBNI and credit costs.
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