BDMN:Rights issue in the offing - Mandiri

During the conference call yesterday, Bank Danamon announced its intention to hold a rights issue in the near term. There are no details on this plan yet as the bank is in the process of getting approval from the capital market regulatory body (Bapepam). In our view, this rights issue can serve 3 purposes (1) maintaining sound CAR (2) strengthening liquidity as the bank’s straight LDR is already at its peak and (3) reducing Temasek’s portion in the bank. Even though the first two purposes will support the bank’s future growth, the uncertainties remains on how large the dilution will be. Maintain hold.

A rights issue is in the offing… It’s just two years ago BDMN held a rights issue raising Rp4 tn of fresh funds. Post rights issue, CAR recorded at 21.3% (at end Jun09). However, the bank’s aggressive loan expansion after rights issue, the bank’s additional stakes at ADMF and the inclusion of operational risk in the calculation of CAR brought down the bank’s CAR to 12.05% at end Mar11. This triggered the need for new capital raising for the bank. During the conference call yesterday, the management only highlighted its intention to maintain minimum 12.0% CAR in the future.

.. which will also serve as a way to enhance liquidity. In our previous notes, we mentioned our concern on the bank’s liquidity. At end Mar11, straight LDR was recorded at 106% (or 98% if we take bonds into LDR calculation). The bank needs to boost its deposits higher than the loan growth to bring down its LDR and maintain a healthy liquidity position (at end Mar11, secondary reserves was estimated at around Rp13 tn – net of repo securities). That said, the bank might need to offer higher TD rates as its CASA proportion was relatively steady around 35% of total deposits. Projecting higher interest rates next year, BDMN might be further hurt in terms of funding costs. Therefore, new fresh funds from the rights issue might well serve this needs. Not only it will strengthen the bank’s liquidity position, but it will also support better NIM.

Will it be sizable? Should the rights issue be only intended to maintain CAR of 12% and assuming loan growth of 25% yoy going forward, we estimate that the size might not be different from that of the previous rights issue (= Rp4tn). However, looking at the recent new booking growth in ADMF (+78% yoy in FY10 and 47.9% yoy in 1Q11), a higher than Rp4 tn rights issue size is still very likely. Yet, there remains uncertainties until further detail is announced. Maintain hold.