Bank Rakyat Indonesia's growth in micro loans feared to slow

Average loan yields in micro loans have dropped to 20% in 2012.

According to Barclays, BRI has had a strong rural focus since its inception and has built a large portfolio in the micro- lending segment (30% of the book as of Dec-12). BRI has grown faster in the micro segment than the industry overall and grew its market share to 35% in 2012 from 20% in 2008.

Here's more from Barclays:

Considering that BRI now has significant market share and the industry growth has slowed, we expect BRI’s growth in the micro segment also to slow.

Furthermore, we expect competition in this segment to intensify from both newer players like Mandiri and existing players, particularly regional banks that suffered the most market share loss in the past.

Rakyat responding appropriately; however, spreads likely to decline further
BRI has responded to the slowdown in the industry by increasing its penetration both geographically and in terms of loan ticket sizes. BRI is expanding outlets outside Java to capture new opportunities.

Furthermore, the share of smaller ticket loans (under Rp5mn) in the micro-loans portfolio is also growing. While this is allowing BRI to maintain growth, its average loan yields in micro loans have dropped (28% in 2010 to 20% in 2012).

We expect the pressure on BRI’s spreads to continue as a result of this strategy.

Greater corporate exposure impacts spreads and also raises credit concerns
BRI is increasing its exposure to the corporate segment to compensate for slower growth in the micro segment, in our opinion. This shift in the mix towards lower-yielding corporate loans is also impacting BRI’s overall spreads.

We note that BRI’s experience in the non-SOE corporate segment hasn’t been good in terms of credit quality (its GNPLs reached 7.8% in 2009 in the segment). Faster growth in corporate loans therefore indicates potential risk of an increase in credit costs.

Our concern is that BRI does not have the primary relationships with these borrowers.

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