Bank Danamon Indonesia - 2010 Results Update: Marginally Below Expectations - Citigroup

 Lower Q4 earnings but strong balance sheet growth — The CY10 profit of Rp2.9trn is 2% below forecast, with Q4 profit of Rp680bn down 12% q-o-q. Lower Q4 earnings are due to 1) decline in NIMs to 10.6% (from 11.4%) due to higher reserve requirement and one-off interest expense and 2) flat fee income and lower trading income. Balance sheet growth though was robust, with loan growth of 7% and deposit growth of 13%.

 Changing Balance Sheet Mix — Management focus in 2010 has been on increasing high yield loans and reducing expensive deposits. While loan growth was 31%, asset growth was 20% and Net Interest Income growth was 20% (adjusting for accounting change) even with higher NIMs. It needs to be seen if the year-end surge in deposits is retained or reversed in Q1 2011. Asset quality has improved, though credit cost in auto loans has gone up to 4.3% (from 3.4%).

 Auto Loans speeding On – Loan growth was driven by 59% growth in auto loans, increasing their share to 39%. Micro loan growth was 25% and Wholesale loan growth was 37%. SME loans picked up in Q4 to end with 19% growth. Both Mortgage and Personal unsecured loans are being reduced due to lower spreads and higher credit costs, respectively.

 2011 outlook is business as usual — 1) loan growth guideline is 20%; 2) funding will be a mix of deposits, bond issuance, swaps and borrowings; and 3) inflation is a manageable risk, as proactive measures have been implemented.

 Maintain Sell — Our Sell on BDMN is due to 1) expensive PER multiples with our earnings 6% below consensus; 2) high LDR with BDMN paying upto 8.25% on large time deposits; and 3) declining CAR that we calculate as 12.5% on a standalone basis applying full Operational risk. (The 2010 numbers are actual, but we have used 2010E as we await a detailed income statement & balance sheet).