Bank BNI

Until the third quarter of 2015, Bank Negara Indonesia (BBNI) posted net earnings of Rp6.0 trillion, down 21.2% over the same period in the previous year, and its ROE was only 16.1%, also down compared to the previous period of 22.7%. Although it looks bad at first glance, but when the financial statements released on October 16, BBNI shares remained in its position, ie Rp5,100 per share, and now it is already at 5,250. And although the stock was once dropped until 4,000 when the Jakarta Composite Index (JCI) was under attack in last September 28, but it quickly rose back until reached 5,000 in just two weeks later. So maybe BBNI is not that bad?

Logo of Bank BNI with its slogan: Serve the country, the pride of the nation

Compared to other major banks such as Bank Rakyat Indonesia (BBRI), Bank Central Asia (BBCA), or Bank Mandiri (BMRI), the fundamental of BBNI ain’t the best one though not bad also, but on the other hand the stock valuation is the lowest. With a PBV of only 1.6 times the price of 5,250, BBNI can be called as one of the most inexpensive blue chip shares on the Indonesia Stock Exchange, because any other blue chips usually valued at a PBV of minimum 2.0 times.

However, in the first half of 2015, BBNI only posted net earnings of Rp2.4 trillion, dropped 50.8% over the same period the previous year, and this may be a concern for investors. Actually BBNI’s revenue was still grew by 13.8%, but the profit could fall like that because of the allowance of impairment losses amounting to Rp6.0 trillion, up sharply from the previous year of Rp2.2 trillion. If the losses were still at a reasonable level, say Rp2 or 3 trillion, the company should pocket net earnings of Rp5.5 - 6 trillion, or still up significantly over the previous year.

The question, what does impairment loss mean?

Impairment losses are the record of losses that must be reported by a company if there is strong evidence that the value of the company’s assets in the future may be dropped compared to its current value. In the case of Bank BNI, if there were debtors who are at risk for default (bad credit), then the value of bank’s assets in the future may be dropped if the debtors are really fail. The difference between the projected value of bank’s asset in the future with its current value, is reported in the financial statements as impairment losses.

And if we look at the figure of gross non-performing loan (NPL) of BBNI, which reached 3.0% in the second quarter 2015, or very high for the size of a large and settled bank like Bank BNI, it is natural if the impairment losses were also significant. According to the management, the NPL could be that high because of slowdown of the national economy, where some debtors experienced difficulties to repay their debt to the Bank. However, if later economic conditions improved, the NPL figures can be suppressed, and BBNI will have a better projection of asset’s value/cash flow in the future, and the value of impairment losses can be lowered.

So different than the losses or expenses that has been realized/paid, impairment losses are merely a projection, or in other words the bank did not loss any money, and this figure of impairment losses could be down by itself if the management of the bank later able to reorganize its lending.

Fortunately, until the third quarter, BBNI posted impairment losses of Rp6.4 trillion, or still up compared to the second quarter but now with only small difference, while its gross NPL began to down to 2.8%. And as a result, BBNI posted net earnings of Rp6.0 trillion, which although still down year on year, but much better than the second quarter. Assuming that BBNI just experienced its worst period in the second quarter of 2015, then until the end of this year, the bank is still have a chance to generate net earnings of the same value of 2014.

And how about the shares?

As already mentioned above, the valuation of BBNI is fairly low for the size of big cap stocks (current market cap of BBNI: US$ 7.1 billion), but on the other hand the fundamental quality of the bank is relatively low when compared to BCA, Mandiri, or BRI. However, BBNI is still a good bank, and it is one of the oldest banks in Indonesia with a consistent track record of financial performance in the past, so you cannot buy it at a price that is too low.

So when the JCI was hit by two events of panic selling in late August and late September, BBNI had dropped until its PBV became as low as 1.2 times at the prices of Rp4,000 to 4,250 per share, and I think these were the lowest possible prices you can get (note: PBV 1.2 times means that you pay $12 to acquire an asset worth $10, while taking into account the fundamental and good reputation of BBNI, the $10 assets could be increased by at least two-fold after a few years). Actually, BBNI would probably never go down as low as below Rp4,500 per share if not for problems of impairment losses like mentioned above, so this is actually an opportunity, because by considering the good brand and others, I assume that in the future, the financial performance of the bank will be good again.

But the stock has now priced at 5,250, is it still low? Well, if the purpose is for long-term investment, then yes, the price is pretty low as it reflected PBV of 1.6 times only. However, as a blue chip stock, the movement of BBNI is very easily influenced the JCI and JCI itself is still unstable in recent months (easy to go up significantly, but also easy to go down deeply).

So if you are interested in the stock, then here’s the strategy: 1. Make BBNI as a long-term holding, 2. Divide your money into two or three portions, where the first portion can be used to buy BBNI at the current price, and you could keep the rest just in case should you average down. Based on the experience in 2008 and 2013 (the year in which the stock index fell, just like this year 2015), the JCI reached its bottom peak in August – September (or until October in 2008), then sideways or rebound for a moment, and fell once again in November – December. If JCI experiencing the same pattern in this year, the index will likely to go down once again before the end of the year, although it won’t be as deep as August or September, especially after the performance of the listed companies had been improved in the third quarter. And if the stock index is really dropped, then BBNI will also down, probably bottomed at about Rp4,500 per share. Correct or not, we'll see.

PT Bank BNI (Persero), Tbk

Rating of Performance until Third Quarter of 2015: A

Rating of Stock Value at 5,250: BBB

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