BCA sekuritas - upgrade to target price 600

Date: 05 august 2014

Bank Jatim announced mixed results for 1H14 that accounted for 51.3% and 46.8% of consensus and our FY14 forecast, respectively. Credit quality, one of the main concerns, begins to stabilize even under the usual cyclical trough in 2nd quarters in the banking sector and the current high interest rate environment. Profitability decreased on a quarterly basis due to higher interest expense growth than interest income growth, though we remain confident the bank’s financial performance would recover in the 2H14 and still book healthy net profit growth in 2014.

We maintain our BUY recommendation and positive view on the stock post the analyst meeting given the bank’s i) improving CASA portion in 2H14, hence we see high pressures coming down on interest expenses in the latter half of this year, ii) strong loan and stable income revenue, iii) strong deposit growth and iii) slowing improvements in asset quality hence not much pressures on provisions.

Pressures on profitability came from higher interest expenses, which was in turn attributed to the high fixed rate loan composition of the bank with more than 70% composition. PPOP managed to record subtantial YoY increase by 19.8% in 1H14 but only a slight 4% YoY rise in 2Q14. We believe pressures have peaked i) as the bank maintains strong 68.5% CASA, ii) a committed maximum rate of 7.75% in Time deposits (lower compared to other banks), iii) discipline on operational expenses, iii) normal loss provisions due to improvements in asset quality and iv)