Company visits to Bank Danamon. (Tjandra Lienandjaja) - BNP Paribas

Price 6150, TP 7650, Mkt cap $5,856m, Avg t/o $4.5m

Loan growth is indicated at 31% in 2010, higher than our expectation of 26%. The growth came from the mass market segment, ie. motor cycle financing and micro lending to the non-agricultural based traders.

They also indicated that they were able to increase total deposits significantly in 4Q10, up IDR5t and this is translated into 11% y-y growth compared to 1% y-y in September 2010 and our forecast of 9% y-y for the year. They achieved this through utilization of DSP (micro lending) network by giving incentive to the sales people who used to channel loans only. As a result, CASA now account for 40% of total deposits, up from 33% in 2009. Their target is for CASA to reach 50% of total deposits by 2015, which will reduce cost of funds. This is a big challenge for the bank given that they do not have significant corporate banking customers, which tend to put their deposits in the same banks.

The bank expects NIM to decline to 10.5% in 2011 from 11.3% in 2010 due to rising incentive for motorcycle financing. In addition, cost of funds have risen with some of the large 14 banks breached the gentlemen’s agreement with the central bank to keep deposit rate in check. However, Adira will increase market share (15.7% for new motorcycle financing and 5.2% for new car financing.in 2009) to compensate for the lower margin.

On DSP the strategy will be the same as in Adira in which they will expand to cover for lower margin. Traditionally they concentrate on non-agribusiness traders but will start looking at agribusiness traders to broaden the market penetration. Not keen on corporate lending as yield is only 9% while cost of funds is 6-7%.

Network expansion is to add 150 in 2011 with 40-50 mobile banks in nearby the wet markets (currently Danamon has 250 mobile banks). Expansion for the DSP network will be more in outside Java to tap in new high-yield micro lending customers.

Bank Danamon will maintain the proportion of professional funding (bonds, repurchase agreement, MTN, bilateral loans and trade financing) at 15-20% of total funding. They issued 3-5 year IDR2.8t domestic bonds in December 2010 at 8.75-9% pa. The calculated LDR, which include these type of funding, leads to LDR of 93% compared to 112% straight LDR.

Cost of credits is expected to come down to 3% by 2015 from 3.4% currently through better credit control and loan expansion.

We will be reviewing our forecast, pending results announcement next week but maintain our BUY call for now. Catalyst for the counter is the issue of takeover by DBS, which was denied by DBS management. However, with DBS’ intention to increase its contribution from the region, this is not an impossible target (please refer to a note on DBS by Ng Wee Siang today). Large Indonesian banks have been acquired at the price of 2.5-4.7x historical book value.

2010E: Rec EPS 358, P/E 17.2, P/B 2.8, ROE 17.5, Yld 1.5
2011E: Rec EPS 455, P/E 13.5, P/B 2.5, ROE 19.4, Yld 2.9
2012E: Rec EPS 578, P/E 10.6, P/B 2.2, ROE 21.8, Yld 3.7