BBRI The Loan Book That Worsened for Five Straight Quarters Just Got Dramatically Better

The Streak That Broke

This is BRI's Q1 2017 report (period ended March 31, 2017) - and unlike the Q1 2016 post, which had to work around a short-form OJK filing with no segment note at all, this quarter's report is the full audited-format interim statement, 241 pages with the same Note 41 segment breakdown the FY2016 post mined. That matters, because the single most important number in this filing lives inside that note: Corporate Non-SoE^» gross NPL, which had worsened in every single quarter this series has tracked - 3.62% (Sep'15) → 3.78% (Mar'16) → 4.67% (Jun'16) → 4.78% (Sep'16) → 5.61% (Dec'16) - just fell to 3.69% at March 31, 2017. Five straight quarters of deterioration, undone in one.

The reversal shows up in the segment's profitability too: the officially-reported Corporate segment (a broader classification than the Corporate Non-SoE loan-mix category - see Corporate Segment below) posted a 27.8% net income margin this quarter, nearly triple the 9.7% margin the FY2016 post flagged as the lowest of any lending segment for the full year. Corporate segment provisioning fell to Rp373,293M for the quarter - a small fraction of the roughly Rp835,000M-per-quarter pace the segment ran at throughout 2016. Whatever cleaned up Corporate Non-SoE's book, it happened fast and it happened broadly.

That said, this is one data point after a genuinely bad run, not proof the underlying credit-quality problem is solved - and it arrives the same quarter a different loan-mix category quietly became the bank's actual worst performer (see Key Operational Metrics below). It's also the same quarter a new President Director, Suprajarto, took over from Asmawi Syam, alongside two new Commissioners (Andrinof A. Chaniago replacing Mustafa Abubakar, and Nicolaus Teguh Budi Harjanto) and a new Director (Indra Utoyo replacing Zulhelfi Abidin) - all three still awaiting OJK fit-and-proper approval as of the filing date. A management transition and a sudden credit-quality reversal landing in the same quarter is a coincidence worth watching, not a causal claim this filing itself supports.

Consolidated net income attributable to owners grew 6.4% year-over-year (Rp6,645,700M vs Rp6,245,486M), a healthier pace than FY2016's full-year 3.1%, but the underlying trade-off this series has tracked since Q1 2016 hasn't gone away: loan-loss provisioning grew 45.4% (Rp5,284,272M vs Rp3,606,768M) against net revenue growth of just 13.4% - a wider gap than FY2016's full-year 55.0%-vs-17.6% split was proportionally, even with Corporate's own book improving. Management is still building buffer aggressively; it's just building it against a book that, for one quarter at least, needed less of it.

The Prescription

BRI should use this quarter's Corporate Non-SoE improvement as a reason to investigate, not to relax - a single-quarter reversal after five consecutive quarters of deterioration is exactly the kind of number that deserves a specific explanation (large recoveries, write-offs, reclassification, or a genuine change in underwriting) rather than being banked at face value as "problem solved." Nothing in this filing's notes explains what drove the drop, which is itself the gap worth closing before the next quarter's report arrives.

What BRI should stop doing: paying out a dividend large enough to shrink its own bank-only Tier 1 capital in absolute terms (Rp136,670,139M at December 31, 2016 down to Rp133,636,739M at March 31, 2017 - a 2.2% decline) in the same quarter that risk-weighted assets grew 7.8%, a combination that pushed bank-only Tier 1 CAR down from 21.91% to 19.88% and Total CAR from 22.91% to 20.86% (see Beyond the Usual below). A 40% payout ratio (Rp10,478,309M of FY2016's Rp26,195,772M owners' net income) is a reasonable capital-return decision on its own, but timing it to land in the same quarter capital consumption from loan growth is also accelerating compounds the hit to headline capital ratios more than either factor would alone.

Key Financial Metrics

Q1 2017 vs. Q1 2016 (P&L, consolidated), and Mar 2017 vs. Dec 2016 / Mar 2016 (balance sheet, consolidated)

FX: IDR 13,325.50 = USD 1 (the rate the filed statement itself discloses for March 31, 2017).

Metric	Q1 2017 (IDR)	Q1 2017 (USD)	Q1 2016 (IDR)	YoY
Net Interest, Sharia and Premium Income, net ("Net Revenue" equivalent)	Rp17,972,971M	~$1,349M	Rp15,854,702M	✅ +13.4%
Other operating income	Rp4,026,418M	~$302M	Rp3,821,532M	✅ +5.4%
Other operating expense	Rp8,745,523M	~$657M	Rp8,513,637M	➖ +2.7%
Operating Income (Income from Operations)	Rp7,969,594M	~$598M	Rp7,513,852M	➖ +6.1%
Net Income (attributable to owners)	Rp6,645,700M	~$499M	Rp6,245,486M	⚠️ +6.4%
Total Comprehensive Income (attributable to owners)	Rp7,741,616M	~$581M	Rp7,453,457M	✅ +3.9%
EPS (basic, quarterly, consolidated)	Rp271.83	~$0.0204	Rp253.39	✅ +7.3%

Balance sheet metric	Mar 2017 (IDR)	Mar 2017 (USD)	Dec 2016 (IDR)	QoQ	Mar 2016 (IDR)	YoY
Total Assets	Rp995,999,711M	~$74.77B	Rp1,003,644,426M	➖ -0.8%	Rp864,939,000M	✅ +15.2%
Loans (gross, incl. sharia financing and finance lease)	Rp681,269,438M	~$51.14B	Rp663,420,218M	✅ +2.7%	Rp584,276,000M	✅ +16.6%
Total Deposits (Demand + Savings + Time)	Rp733,954,610M	~$55.10B	Rp754,526,374M	⚠️ -2.7%	Rp658,736,000M	✅ +11.4%
Total Liabilities	Rp851,897,576M	~$63.96B	Rp856,831,836M	➖ -0.6%	n/a	n/a
Total Equity (attributable to owners)	Rp143,685,785M	~$10.79B	Rp146,421,342M	⚠️ -1.9%	Rp112,522,189M	✅ +27.7%
Total Cash and Cash Equivalents (per cash flow statement)	Rp160,215,195M	~$12.03B	Rp188,954,879M	⚠️ -15.2%	Rp131,549,431M	✅ +21.8%

Total cash and cash equivalents, disclosed directly by the filed cash flow statement, is used instead of free cash flow (see the FY2016 post's note on why - the bank exception to FCF applies here too). The QoQ cash decline mirrors the same seasonal pattern the Q1 2016 post flagged a year ago: a first-quarter deposit outflow (giro alone fell Rp28,104,156M) not fully offset by loan repayments, since BRI is a net loan originator this time of year rather than a net collector.

Equity fell 1.9% quarter-on-quarter for a different reason than the cash line: the Rp10,478,309M FY2016 dividend, approved at the March 15, 2017 AGM and paid out this quarter, more than offset the quarter's own Rp6,645,700M of retained earnings (see The Prescription above and Beyond the Usual below for the capital-ratio consequence).

Net income grew faster than any 2016 quarter did, and the loan segment that had gotten steadily worse for five straight quarters abruptly got better - but provisioning still grew more than three times faster than revenue, and a large dividend payout took a visible bite out of capital ratios in the same three months.

Key Operational Metrics

• CASA ratio^»: 56.63% (Bank, Mar 2017) vs 56.54% (Bank, Mar 2016) - essentially flat year-over-year, holding the FY2016 gain rather than extending it.
• Loan-to-deposit ratio (LDR)^»: 93.15% (Bank, Mar 2017) vs 87.77% (Bank, Dec 2016) - back above management's own ~90% target band after the FY2016 post noted it had briefly returned inside that band, mechanically because deposits fell 2.7% quarter-on-quarter while loans grew 2.7% - the same seasonal Q1 pattern (loan disbursement continuing while deposits pull back) this series has now seen in every first quarter it's covered.
• Net Interest Margin (NIM)^»: 8.08% (Bank, Mar 2017) vs 8.27% (Bank, Dec 2016) and 8.09% (Bank, Mar 2016) - essentially flat year-over-year, a small sequential dip from the full-year figure.
• ROA^» (before tax): 3.34% (Bank, Mar 2017) vs 3.65% (Bank, Mar 2016) - down year-over-year, continuing the gradual multi-year decline this series has tracked since 2015.
• ROE^» (Tier 1): 18.77% (Bank, Mar 2017) vs 26.55% (Bank, Mar 2016) - a sharp year-over-year drop, but mechanical rather than a weaker business: the H1 2016 post's asset revaluation and the 9M 2016 post's reserve reclassification both swelled the Tier 1 capital base this ratio divides by, so a falling ROE against a rising Tier 1 capital figure (see below) reflects a bigger denominator, not weaker earnings - the same read the FY2016 post gave for the year-end figure.
• CAR^» (Total, Bank): 20.86% (Mar 2017) vs 22.91% (Dec 2016) - a genuine quarter-on-quarter decline, this time from the dividend payout, not a one-off revaluation (see Beyond the Usual below for the full mechanics).
• NPL ratio - gross: 2.16% (Bank, Mar 2017) vs 2.03% (Bank, Dec 2016) and 2.22% (Bank, Mar 2016) - a normal seasonal Q1 uptick from year-end, and still an improvement year-over-year.
• NPL ratio - net: 1.22% (Bank, Mar 2017) vs 1.09% (Bank, Dec 2016).
• Cost-to-income (BOPO^»): 39.27% (Bank, Mar 2017) vs 42.06% (Bank, Mar 2016) - a genuine efficiency improvement year-over-year.
• Cost of Fund: 3.74% (Bank, Mar 2017) vs 3.98% (Bank, Mar 2016) - continuing the multi-quarter decline this series has tracked as CASA's payoff.
• NPL coverage: not separately restated in this filing's own "Key Take Aways" summary the way FY2016's was; the loan-loss allowance movements are disclosed in the segment and asset-quality notes instead (see Beyond the Usual below).
• Medium-segment NPL (loan-mix classification): 7.34% (Bank, Mar 2017), up from 7.13% at Dec 2016 and 6.68% a year earlier - now the single worst-performing loan-mix category BRI discloses, having overtaken Corporate Non-SoE's 3.69% this quarter. This is a new thread this series hasn't previously flagged as the leading concern; see Beyond the Usual below.
• Micro loans: Rp216.1 trillion outstanding (Bank), +14.0% year-over-year, with 9.0 million borrowers - a deceleration from the Q1 2016 post's 20.4% growth rate, off a much larger base. Micro NPL rose to 1.35% from 0.99% at Dec 2016 (a normal seasonal pattern) but improved from 1.54% a year earlier.
• BRILink (third-party agents using BRI's e-banking infrastructure via fee-sharing): agent count grew 64.5% YoY to 97,583, transaction count grew 148.0% YoY, and transaction volume grew 168.1% YoY to Rp56.3 trillion - still growing fast but decelerating from the FY2016 post's full-year rates, the same base-effect pattern flagged there.
• Related-party asset exposure: not disclosed as a single consolidated percentage in this filing the way the 9M 2016 and FY2016 posts tracked it; Note 44's related-party transaction list (see Beyond the Usual below) is qualitative rather than a single aggregate figure this quarter.
• Branch network: 5,379 BRI Units and 3,183 Teras BRI locations, plus a new fifth overseas branch (Timor Leste, alongside Cayman Islands and Singapore) and a new Hong Kong representative office opened this quarter - the network expansion detail this filing discloses that the presentation deck doesn't.
• Headcount: 60,072 employees at March 31, 2017, up from 58,885 at December 31, 2016 (+2.0% in one quarter).

A seasonal note: Q1's own profit level continues to sit below the prior Q4, consistent with the multi-year Q1-trough / Q4-peak shape the H1 2016 post first flagged - this quarter's Rp6,645,700M compares to Q4 2016's Rp7,244,911M (a -8.3% sequential dip), right where the seasonal pattern would put it.

Five Segments, One Sharp Reversal in the Worst One

BRI reports five operating segments for management purposes: Micro, Retail, Corporate, Other Segments, and Subsidiaries. One structural limitation this quarter: unlike the FY2016 post's annual filing, which had a genuine Q1-comparable prior-year segment column, this interim filing's own Note 41 compares Q1 2017 only against the full FY2016 year - not against Q1 2016 - so no true YoY segment growth rate can be computed from this document alone. The figures below are read against the FY2016 base (a full year, not a comparable quarter) accordingly; only the loan-mix NPL data (a separate note, tracked quarterly) supports a genuine YoY comparison, and that's where this quarter's real story sits.

Micro Segment

Segment net income for the quarter was Rp2,833,988M on total income of Rp9,454,816M (a 30.0% net margin) - a reasonable run-rate against FY2016's Rp15,072,722M full-year total, and Micro loans grew to Rp227,090,290M in the segment note (Rp216.1 trillion on the bank-only presentation basis - see Key Operational Metrics above). Provisioning of Rp2,309,243M this quarter continues to run high relative to total income, the same pattern the FY2016 post first flagged as pressuring even BRI's best-performing segment.

Retail Segment

Segment net income was Rp2,229,376M on total income of Rp8,408,921M (a 26.5% net margin), with provisioning of Rp2,468,099M - the largest single provisioning charge of any segment this quarter, continuing the pattern the FY2016 post flagged when Retail posted the sharpest full-year provisioning growth rate of any segment. On the loan-mix classification, Medium NPL - which sits inside this broader Retail segment - is now the worst-performing category BRI discloses (see Key Operational Metrics above), a new concern this series hasn't previously named as the leading one.

Corporate Segment

Segment net income was Rp454,799M on total income of Rp1,634,875M - a 27.8% net margin, nearly triple FY2016's full-year 9.7% (the lowest of any lending segment that year). Provisioning fell to Rp373,293M for the quarter, a fraction of the roughly Rp835,000M quarterly pace the segment ran through 2016. On the loan-mix classification, Corporate Non-SoE gross NPL fell from 5.61% at Dec 2016 to 3.69% at Mar 2017 - reversing five straight quarters of deterioration in a single quarter (see The Streak That Broke above). Segment loans grew to Rp180,586,136M.

Other Segments and Subsidiaries

"Other Segments" (treasury and non-lending activity) posted net income of Rp954,723M on total income of Rp1,667,347M - a 57.3% net margin, the highest of any segment, consistent with a non-lending, low-provisioning business line. Subsidiaries' net income was Rp186,725M on total income of Rp833,430M (22.4% margin) - now five subsidiaries strong following PT BRI Multifinance Indonesia (BRI Finance)'s consolidation, which the FY2016 post first flagged; see Beyond the Usual below for BRI Finance's own quarter.

Segment Comparison

Segment	Total Income (Q1 2017)	Net Income (Q1 2017)	Net Income Margin	Provisioning (Q1 2017)
Micro	Rp9,454,816M	Rp2,833,988M	30.0%	Rp2,309,243M
Retail	Rp8,408,921M	Rp2,229,376M	26.5%	Rp2,468,099M
Corporate	Rp1,634,875M	Rp454,799M	✅ 27.8%	Rp373,293M
Other Segments	Rp1,667,347M	Rp954,723M	57.3%	Rp0
Subsidiaries	Rp833,430M	Rp186,725M	22.4%	Rp133,637M

Other Segments shows no provisioning charge at all this quarter (its own line item in the segment note's expense breakdown is blank) - consistent with it being a treasury and non-lending business line with no loan book to provision against.

Read together: Corporate went from the segment with the worst margin in FY2016 to the second-best this quarter, on the back of the same NPL reversal driving The Streak That Broke above. But Micro and Retail - the two segments actually carrying most of BRI's loan book - still show provisioning eating heavily into total income, the same structural pattern the FY2016 post flagged when it noted the bank's fastest-growing segments were also the ones whose profit had gone backward. One good quarter from Corporate doesn't change that Micro and Retail remain where the bank's actual profit-growth ceiling sits.

Beyond the Usual

This is a full audited-format interim filing - unusual for a Q1 report in this series, which has previously only had the short-form OJK publication to work with at this point in the year - and the notes reward the extra depth with real color: a capital-ratio mechanic worth naming precisely, a segment-reporting quirk worth flagging, and the usual purchase-commitment and related-party disclosures.

A dividend payout shrank Tier 1 capital in absolute terms

Bank-only Tier 1 capital fell from Rp136,670,139M at December 31, 2016 to Rp133,636,739M at March 31, 2017 - a 2.2% decline in absolute Rupiah terms, not just a ratio effect. The cause is disclosed directly in Note 31d: shareholders approved a Rp10,478,309M dividend from FY2016's net income at the March 15, 2017 AGM (a roughly 40% payout ratio, up from FY2015's ~30%), and that payout, once distributed, more than offset the quarter's own Rp6,475,000M-ish of bank-only retained earnings. Combined with risk-weighted assets growing 7.8% quarter-on-quarter (Rp623,857,728M to Rp672,175,728M, driven by loan growth), bank-only Tier 1 CAR fell from 21.91% to 19.88% and Total CAR fell from 22.91% to 20.86% - both are the mirror image of the FY2016 post's capital jump, which was driven by organic retained-earnings growth rather than a one-off. This one is a genuine capital-ratio decline, not another revaluation or reclassification artifact - and it's worth watching whether next quarter's ratios stabilize or keep drifting down as loan growth continues without a matching capital raise.

This quarter's segment note can't actually show year-over-year segment growth

Note 41 of this interim filing presents Q1 2017's segment figures against a comparative column labeled "31 Desember 2016 dan untuk Tahun yang Berakhir pada tanggal tersebut" - the full FY2016 year, not Q1 2016. That means a reader trying to compute a genuine year-over-year segment growth rate from this document alone can't do it; a quarter's income and net income figures aren't comparable to a full year's. This differs from the FY2016 post's annual filing, which did carry a genuine prior-year comparative, and from what a reader might expect an interim report to disclose. The loan-mix NPL data in the separate asset-quality note (a different disclosure, tracked quarterly across the whole series) is the only genuinely YoY-comparable segment-adjacent figure this filing offers - which is what The Streak That Broke above relies on instead of the segment note itself.

BRI Finance's first full quarter inside the segment note

PT BRI Multifinance Indonesia (BRI Finance), consolidated mid-2016 and first covered by the FY2016 post, now appears with its own actuarial disclosure for termination benefits (Note 42) alongside BRI's four other subsidiaries - the first quarter this series has seen BRI Finance treated as a fully routine part of BRI's disclosure package rather than a newly-acquired entity still being explained.

BRI opened a new overseas branch in Timor Leste this quarter (its fifth overseas location, alongside Cayman Islands and Singapore branches and New York and Hong Kong representative offices) - the first disclosed overseas network expansion this series has recorded since the BRISat launch period.

Several new equipment and services procurement agreements were signed this quarter - 231 Daihatsu vehicles (Rp39,270M), digital banking devices (Rp5,758M), advertising-agency placement services for four quarters of financial statements (Rp3,250M), and 350,000 printed calendars (Rp5,910M) - alongside carryover commitments from late 2016 (the Rp210,549M BRISat VSAT lease the FY2016 post flagged, plus several ATM and hardware procurement contracts). None individually material, but collectively they show the bank's operating-commitment footnote staying active quarter to quarter rather than being a rare disclosure.

The bank's pending-litigation allowance fell to Rp576,748M at March 31, 2017, from Rp613,720M at December 31, 2016 - the first quarter-over-quarter decline this series has recorded for this line, after the FY2016 post flagged its steady growth through 2016. Management's own language on the underlying disputes (ordinary contractual-compliance claims, not expected to materially affect operations) is unchanged from prior filings.

Custodial assets under BRI's custody division fell from Rp320,285,896M at Dec 2016 to Rp246,629,519M at Mar 2017 (-23.0%) even as custodial fee income rose from Rp13,141M to Rp15,970M (Q1-over-Q1) - a fee-services business generating more revenue from a smaller asset base, worth noting without over-reading a single quarter's asset swing in a fee-for-service line.

Target Valuation Range

~2.01x P/B (~10.8x P/E) - fairly valued, with both P/E and P/B expanding modestly from the FY2016 post as the share price outran earnings and book value growth this quarter.

BRI's share price (converted to the nominal terms actually quoted at the time, adjusting for the November 2017 1:5 stock split, since price data pulled today for this period reflects that split retroactively) closed around Rp11,795 on March 31, 2017 - up 11.1% from the roughly Rp10,613 close the FY2016 post reported for December 30, 2016, and up 13.6% from the Rp10,386 close the Q1 2016 post reported a year earlier. That's a real move but short of the ~30-40% peak-to-trough threshold this series uses to warrant a dedicated stock-price section, so it's folded into the valuation read here instead. Shares outstanding remain 24,669,162,000 issued, of which 221,718,000 sit in treasury (24,447,444,000 outstanding) - unchanged from every prior quarter this series has covered.

Market cap → enterprise value	Q1 2017
Share price (period-end)	Rp11,795
Shares outstanding	24,447,444,000
Market capitalization	Rp288,358B (~$21.64B)
Total liabilities	Rp851,898B
Less: cash and equivalents	Rp160,215B
Enterprise value	Rp980,041B (~$73.55B)

Valuation multiple	FY2016 (Q4 2016)	Q1 2017	Change
P/E (TTM)	~9.9x	~10.8x	⚠️ up
P/B	~1.77x	~2.01x	⚠️ up

• P/E: ~10.8x, using a trailing-twelve-month EPS of approximately Rp1,090 (FY2016's Rp1,071.51 full-year EPS, minus Q1 2016's Rp253.39, plus this quarter's Rp271.83) - up from the FY2016 post's ~9.9x, entirely because the share price rose faster than trailing earnings did.
• P/B: ~2.01x, using book value per share of ~Rp5,879 (Rp143,685,785M total equity attributable to owners ÷ 24,447,444,000 shares outstanding) - up from the FY2016 post's ~1.77x, mechanically because the share price rose 11.1% while book value per share actually fell slightly (the dividend payout reduced equity).

Both multiples expanded from FY2016 - the share price move outpacing both earnings and book-value growth. A ~10.8x P/E against a bank-only Tier 1 ROE of 18.77% (down from Mar 2016's 26.55%, but mechanically depressed by the enlarged Tier 1 capital base from 2016's revaluation and reclassification - see Key Operational Metrics above, not a weaker business) remains a reasonable, arguably still-cheap multiple for that level of return. No same-period peer comparison is available yet - Indonesia's other large listed banks haven't been covered for a comparable period in this series.

A full DCF still isn't included here - eight quarters of tracked history now exist, but a segment note this quarter that can't support a genuine YoY comparison (see Beyond the Usual above), plus a five-quarter NPL streak that just reversed without explanation, are exactly the kind of open questions that should be resolved before committing to multi-year loan-growth and margin assumptions. The peer-multiple read above, alongside Beyond the Usual, is the honest valuation lens for this quarter.

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