Bank Rakyat Indonesia warned of a challenging 2H13

BRI's pricing power is eroding.

According to Maybank Kim Eng, BRI has been increasing its investment in human resources for its micro lending segment since late 2011. The larger portion of the investment was expended by end of 2012, resulting in higher operating expenses in that year.

Here's more from Maybank Kim Eng:

The rest of 2013 may still be challenging for as we notice that competitors are beginning to penetrate BRI’s micro stronghold. This is eroding BRI’s pricing power as evidenced in its reduced 22% rate to Kupedes from the previous 26%-28%.

Nevertheless, BRI’s micro lending history and familiarity with potential customers gives it the advantage of being able to filter and select quality borrowers. Hence, its risk-adjusted margin is still far above that of new entrants. Lower exposure to SME lending helped BRI to further reduce its overall NPL.

Predominantly a retail lender, BRI started offering loans to SOEs in an attempt to offset the slack growth in micro and consumer credit. This was also a strategic move as BRI expected the SOE lending to produce a trickledown effect resulting in higher consumer lending and deposit taking.

We believe this will be its main source of CASA growth in future despite the drop in 1Q13 which was arguably caused by the withdrawal of temporary placements by SOEs and the Indonesian government early in the year. These withdrawals also caused the LDR to spike higher than the seasonal 1Q norm.