But although Bank Rakyat Indonesia (BRI) is forecast to see rising credit disbursement in the coming years, yields should fall because the contribution of micro credit (in Indonesian: Kredit Usaha Rakyat, or KUR) toward the bank's total loan disbursement will increase. While in 2015, KUR accounted for 31.7 percent of BRI's total loans, the portion is estimated to grow to 32.5 percent this year and grow further to 33.1 percent in 2017.

The problem with KUR, a program that was launched in 2007, is that it is risky business for banks because it gives rise to a higher percentage of non-performing loans (NPLs). KUR is a government-sponsored subsidy offered to Indonesia’s smallest entrepreneurs. Through KUR, Indonesia’s commercial banks can provide working capital at lower interest rates (compared to other micro loans). This is made possible by an insurance plan involving state-owned insurance firms Perum Jamkrindo and Askrindo. Last year BRI's NPLs averaged 2.0 percent. However, the ratio is expected to rise to 2.3 percent in 2016.

Both lower yields and the rising NPL can undermine BRI's net interest margin (NIM), which is the difference between the interest income generated and the amount of interest paid out to the lenders. Last year, BRI's NIM stood at 7.9 percent.

In the first eight months of 2016 credit growth of BRI expanded 17 percent (y/y). Micro-credits grew fastest at 22 percent (y/y).

RHB OSK Securities sees ample room for growth of BRI's shares on the Indonesia Stock Exchange. Recently, the securities firm revised (up) its target for BRI's shares from IDR 12,900 to IDR 14,500 a piece, implying that it advises investors to invest in this asset. On Friday (21/10) BRI's shares climbed 0.82 percent to IDR 12,225 per share. So far this year, the company's shares have risen 7 percent.

Stock Quote Bank Rakyat Indonesia (BRI) - BBRI:

Visible in the graph below, Bank Rakyat Indonesia conducted a 1:2 stock split on 11 January 2011

Earlier this year BRI issued IDR 1.92 worth of medium term notes to enhance the bank's liquidity in the context of rising credit disbursement. In full-year 2016 BRI targets to issue IDR 5 trillion of medium term notes. In addition, BRI plans to issue bonds worth IDR 20 trillion to refinance maturing debt and to take advantage of repatriated funds from the government's tax amnesty program. IDR 10 trillion of the bonds will be sold in 2016 and the remainder next year.

One of the strengths of BRI is that it has 10,628 branches spread across the Archipelago. This means that the bank is in a great position to tap the largely untapped market. Indonesia’s banking sector is underdeveloped due to low financial literacy of the Indonesian population, hence banking penetration remains at a low level. Based on data from the World Bank, only 36.1 percent of Indonesia’s adult population owned a bank account in 2014. This implies that there is ample room for growth, particularly for those banks that rely on a wide network.

Future Projection Financial Performance Bank Rakyat Indonesia (BRI):

     2014    2015   2016F   2017F   2018F
Net Interest Income
 51,442  58,280  66,049  73,528  81,778
Net Profit
 24,242  25,398  25,579  27,573  30,226
P/BV (x)
    3.1     2.6     2.1     1.8     1.6
P/E Ratio (x)
   12.4    11.8    11.7    10.9     9.9

in billion IDR rupiah, except stated otherwise
Source: RHB OSK Securities (20/10/2016)