Earlier the Indonesian government signaled that it wants to increase the funds that are allocated to its FLPP scheme to IDR 13 trillion (approx. USD $992 million) in 2017, up from IDR 9.2 trillion this year. Moreover, in the years 2015 and 2016 the government had already increased fund allocations for the FLPP by 67 percent and 84 percent, respectively.

However, there exist some risks related to the FLPP funding scheme as the government signaled its intention to change the funding ratio from 90:10 currently (government:consumer) to 60:40 (and it remains unknown whether the government will also adjust the lending rates, currently set at 5 percent). If this plan is indeed carried out, it would cause a lower gross margin for Bank Tabungan Negara, perhaps toward 2.6 percent, which would be below its management's minimum guidance of 3.8 percent. However, we believe it is unlikely that the government will change the funding ratio drastically as that would jeopardize the success of its one million houses program.

A blossoming FLPP scheme will surely boost earnings of Bank Tabungan Negara (BTN), Indonesia's state-controlled leader in the mortgage loan sector. But there is also another positive matter that will support BTN's corporate earnings. With government bond (SUN) yields dropping significantly (the 10-year yield has fallen from an average of 8.4 percent in 2015 to 6.8 percent this year) it becomes less expensive for BTN to issue corporate bonds (as government bonds tend to be the benchmark for corporate bonds). In other words, it becomes less expensive to finance credit.

Over the next two years BTN plans to issue IDR 10 trillion worth of bonds to finance credit. Last week, BTN had already announced that it is to issue IDR 3 trillion worth of bonds, named Sustainable Bond II Phase 2 Year 2016, which will be divided in two series: Series A, with a three-year tenor (maturing on 30 August 2019), has a total issuance value of IDR 1.34 trillion and a coupon rate of 8.2 percent. Series B, with a five-year tenor (maturing on 30 August 2021), has a total issuance value of IDR 1.65 trillion with a coupon of 8.75 percent. Proceeds will be used for its mortgage schemes.

Future Projection of Bank Tabungan Negara's Financial Highlights:

    2014   2015  2016F  2017F  2018F
Net Interest Income  5,465  6,811  7,855  9,160 10,671
Operational Revenue
 6,359  7,917  9,092 10,529 12,226
Net Profit  1,116  1,851  2,309  2,743  3,168
P/E Ratio (x)   18.4   11.2    9.0    7.6    6.6
P/BV (x)    1.7    1.5    1.1    1.0    0.9

in billion IDR rupiah, except otherwise indicated
Source: CIMB Securities (16/08/2016)

Securities company RHB OSK advises investors to purchase stocks of Bank Tabungan Negara and set its target price for the company's shares at IDR 2,420 a piece (this target is based on an unchanged FLPP funding ratio). On Friday (19/08) shares of Bank Tabungan Negara rose 0.78 percent to IDR 1,940 per share. So far this year the bank's shares have surged 49.81 percent.

Stock Quote Bank Tabungan Negara - BBTN: