Bank Danamon: Fully Valued; Rp5,800; TP Rp5,500; BDMN IJ Plans to raise capital via rights issue - DBS

Bank Danamon (BDMN) announced its intention to raise equity capital via a renounceable rights issue. The bank has submitted its plan to Bapepam and IDX. However, it will only announce further details in the next few weeks. Citibank and Deutsche Bank have been appointed as standby purchasers, while Danareksa Sekuritas is the arranger for the transaction.

The bank held a brief conference call but did not release any details of the proposed rights, except that it would likely be completed by year end. Management said that the proposed rights issue is a proactive move to further strengthen its capital base for further business growth over the next three years. There is no change in its guidance for now. BDMN’s business focus is still to grow mass market loans, while building up its liability franchise.

BDMN’s Total CAR as at 1Q11 stood at 12.1% (bank level) and 14.7% (consolidated). Management said that it was comfortable with Total CAR at above 12%. We were surprised by BDMN’s planned rights issue and will reassess when details are available. BDMN raised Rp4tn from a rights issue back in April 2009 that lifted Total CAR by 1.5 ppts to 22.7% then.

We are retaining our Fully Valued call and Rp5,500 target price, which is equivalent to 2.2x FY11 BV. It is based on the Gordon Growth Model with the following assumptions: 21% ROE, 11% long-term growth and 15.3% cost of equity. While BDMN excels in asset growth, especially in the mass market segment, it still lags its peers in deposits. Asset yields are declining, while CASA is not rising fast enough to offset margin compression. There is persistent near-term pressure. BDMN is expected to release its 2Q11 result next week.