Bank Neo Commerce (BBYB.IJ IDR 276 BUY.TP IDR 600) Improving NPLs and higher coverage to drive lower provisions, supporting FY24/25F earnings growth

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Bank Neo Commerce (BBYB IJ)

Improving NPLs and higher coverage to drive lower provisions, supporting FY24/25F earnings growth

FY23 net losses of Rp573bn were better than our expectation as NIM came in higher-than-expected on higher loan yields and higher LDR.
We continue to expect positive net profit in FY25F and cut our FY24F net losses forecast by half, driven by lower provisions.
Maintain Buy rating with a lower TP of Rp600 based on the 3-stage DDM as we adjust for expectations of slower LT loans growth.

Lower losses in 4Q23 earnings, beating our expectations

BBYB reported net losses of Rp573bn in FY23, better than our forecast of Rp654bn (88% of FY23 est) but worse than the consensus of Rp494bn (116% of the FY23 estimate). The FY23 net losses were also lower (-27% yoy) vs. FY22 as BBYB doubled its NII (+117% yoy) and lowered its opex (-16%) though earnings were partly offset by higher provisions (+157%). 4Q23 earnings were close to BEP, with net losses of Rp7bn (-97% qoq, -96% yoy), supported by improving NIM (21.0%) and a lower CIR (25.5%), despite a higher CoC (29.9%).

Lower provisions to drive earnings growth

BBYB booked provisions of Rp2.8tr in FY23 (+157% yoy) resulting in a higher CoC of 26.3% (vs. 14.8% in FY22), reflecting the rise in NPLs to 3.9% in 9M23 (vs. 2.6% in FY22). On a positive note, BBYB managed to reduce NPLs to 3.7% in FY23 and is looking to reduce them further to 3.5% in FY24. We believe this is achievable as the bank is also growing its productive loans portfolio. Hence, we now foresee a 23% decrease in provisions (CoC at 17.8%) to drive earnings growth in FY24.

We raise our FY24/25F NP estimate on higher NIM and lower provisions

We cut our FY24F net losses forecast by half and raise our FY25F net profit estimate by 7-fold (from a low base) on the back of a higher NIM of 14.6%/15.9% (vs. 12.8%/13.6% prev.) on higher-than-expected loan yields and lower CoC of 17.8%/15.7% (vs. 15.6%/13.4% prev.). Our forecast of positive net profit in FY25F is supported by estimated loan growth of 19.7/14.8% in FY24/25F. BBYB also aims to increase its productive loan portion which will partly help to improve its credit quality.

Maintain BUY with a lower TP of Rp600

We believe the stock is attractive given its NPLs cycle has peaked, the low LDR, and higher loans coverage, which should support earnings growth in FY24/25F. We trim our TP from Rp700 to Rp600 as we adjust lower our LT loan growth forecasts, partly offset by higher NIM and CoC. Risks to our view are a reversal in the trend of falling NPLs and higher-than-expected provisions.

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