Indonesia's tax amnesty program - through which (former) tax evaders are offered attractive tax rates as well as impunity from prosecution and penalties when they declare and repatriate their offshore funds into Indonesia - is expected to give rise to a huge flow of capital into Indonesia (the government targets to see the repatriation of IDR 1,000 trillion before the end of the program on 31 March 2017, a target that may be too ambitious). Bank Central Asia (BCA) is one of the 18 commercial banks that were selected by the government to handle tax amnesty applications. Former tax evaders need to calculate their tax duties and make the payment one of the 18 banks. After this transaction they are required to fill in an asset declaration form and hand it over at the nearest tax office to obtain a tax amnesty notice from Indonesia's Finance Ministry. If they decide to repatriate funds from abroad (usually stashed in so-called tax havens), then they must open a special account at one of the 18 selected banks after having received the notice from the Finance Ministry.

Meanwhile, gross domestic product (GDP) growth of Indonesia is expected to accelerate. In 2015 GDP growth slowed to a six-year low of 4.8 percent due to low commodity prices, weak global growth, and Indonesia's high interest rates undermining people's purchasing power (these high rates were needed to combat high inflation, curb the wide current account deficit and support the rupiah). Although global growth remains sluggish, while commodity prices are yet to recover, the domestic macroeconomic picture of Indonesia looks more rosy now with inflation and the current account under control, while the Indonesian rupiah has appreciated around 5 percent against the US dollar so far this year. This partly explains why Bank Indonesia could cut its key interest rate (BI rate) from 7.50 percent at the year-start to 6.50 percent, implying demand for credit (both consumer and corporate) should climb.

BCA's net interest margin (NIM) - this is the difference between the interest income generated by the bank and the amount of interest paid out to its lenders, relative to the amount of its interest earning assets - is expected to fall in the second half of 2016 compared to the first half of the year when BCA's NIM was recorded at 7 percent. BCA's declining NIM is caused by the bank's lower credit rates (in line with the central bank's lower BI rate). Regarding full-year 2016 BCA's NIM is forecast to fall to 6.6 percent from 6.8 percent one year earlier.

Despite the lower NIM, Jakarta-based CIMB Securities expects to see improving earnings for BCA in the second half of 2016. Its net interest income - income from lending money to customers after deducting the costs of paying its depositors - is forecast to rise to IDR 38.71 trillion (approx. USD $2.95 billion) in full-year 2016, up from IDR 36.8 trillion last year. Net interest income of BCA rose 15 percent (y/y) to IDR 19.8 trillion in the first half of 2016. Meanwhile, non-interest income - which includes income from transaction fees, commissions and other gains - climbed 17.1 percent (y/y) to IDR 6.4 trillion over the same period. BCA's net profit is expected to grow from IDR 18.01 trillion in 2015 to IDR 18.99 trillion in 2016.

Future Projection of Bank Central Asia's Financial Highlights:

    2014   2015  2016F  2017F  2018F
Net Interest Income 32,889 36,801 38,715 42,644 47,276
Operational Revenue
41,213 47,698 49,997 55,154 61,164
Net Profit 16,486 18,019 18,996 21,504 23,590
P/E Ratio (x)  21.92  19.77  18.75  16.57  15.10

in billion IDR rupiah, except otherwise indicated
Source: CIMB Securities (22/07/2016)

All in all, BCA's earnings in the first half of 2016, released earlier this week, were in line with analyst estimates. Net income rose 12.1 percent (y/y) to IDR 9.6 trillion (approx. USD $731 million) in the first six months of the year supported by solid loan growth and income from its businesses. Jahja Setiaatmadja, President Director at BCA, said the bank managed to show solid growth through careful credit distribution and third-party funds management. He added that BCA has been successful in curtailing the cost of funds since last year.

Total outstanding loans of BCA rose 11.5 percent (y/y) to IDR 387 trillion in the first half of 2016, slightly slowing from the growth figure recorded last year. This is attributed to lower demand for working capital credit and investment credit in Indonesia.

Meanwhile, BCA's non-performing loans (NPLs) doubled to 1.4 percent in H1-2016, from 0.7 percent in H1-2015 as sluggish macroeconomic growth of Indonesia affected all sectors of the economy, thus boosting bad loans. As the Indonesian economy is expected to improve further in the second half of the year, bad loans should somewhat fall before the year-end. But even at 1.4 percent BCA's NPL ratio remains among the lowest of Indonesia's largest banks, hence indicating good credit quality.

CIMB Securities set its target price for BCA shares at IDR 15,500 a piece due to the positive outlook. On Friday (22/07) shares of the bank fell 0.17 percent to IDR 14,525 per share. So far this year, however, BCA's shares have risen 9.21 percent.

Stock Quote Bank Central Asia - BBCA: