Bank Tabungan Negara's FY17 earnings to be driven by strong mortgage growth

Loan quality will also improve.

Maybank Kim Eng raised its FY17-18F earnings by 11% and 7%, respectively, after adjusting for the higher loan base and lower tax rate.

"Our new 2017 forecast implies 19% EPS growth and 15.3% ROE, which will be supported by strong mortgage growth and improving loan quality."

Here's more from Maybank Kim Eng:

Bank Tabungan Negara's (BBTN) core FY16 profit was 11% above our estimate, driven by higher than expected loan growth and lower tax rate that the bank is eligible for from having 40% free float.

Our FY17-18F earnings assume strong mortgage demand in the mid-low segment, which should drive the 17% YoY loan growth in our model. We use a more conservative loan growth assumption in 2017 than management guidance of 22% YoY as we assume a delay in the disbursement of subsidised mortgages.

Another main driver of our 19% YoY EPS growth for 2017F is our assumption of further improvement in loan quality after a surprisingly low NPL of 2.8% at YE16.

Based on our estimate, BBTN still has room to push NPLs even lower to 2.5% by YE17 due to the declining balance of 2009-2010 subsidised mortgages, which were the main causes of the spike in NPLs in 2012-2013.

Combined with management’s strategy to shift towards the low-risk government-related projects in its commercial lending, BBTN should be able to maintain low credit cost of 0.4% while keeping its NPL coverage stable at 43%.