Bank Danamon: Fully Valued; Rp6,300; TP Rp5,500 prev Rp6,000; BDMN IJ Short-term pressures mounting DBS Vickers

• Growth to moderate after a sterling 2010
• NIM pressured as non-mass market loans expand
• Funding still a concern; still heavily reliant on time deposits and corporate bonds
• Maintain Fully Valued, TP trimmed to Rp5,500

Turning cautious. The 20% loan growth guidance for 2011 pales in comparison to 2010’s 31% as inflationary pressures mount. Besides strong growth in the mass market segment, particularly auto finance under Adira Finance (2010: 60%), Danamon’s micro lending business (Danamon Simpan Pinjam, DSP) grew 25% yoy. Growth at Adira Finance is expected to taper down to 15% yoy in 2011, while DSP should continue to grow at 18% yoy.

NIM under pressure; earnings cut by 8-13%. Danamon is expected to still focus on traditional markets micro lending (19% of its total loans) and auto finance (37% of loans), and also grow lower-yielding commercial and corporate loans, which would pressure NIM. But that should be compensated by larger proportion of low-cost deposits (CASA) in the longer term. Danamon is targeting 50% CASA to total deposit ratio in the next 2-3 years vs. 39% now. We expect it to continue to fund its operations with time deposits and corporate bonds, which would raise cost of funds for now. We trimmed earnings by 8% (FY11F) and 13% (FY12F) and introduced FY13 forecasts.

Least preferred Indonesian bank. We are retaining our Fully Valued called, with a lower fair value of Rp5,500 (from Rp6,000), which is equivalent to 2.2x FY11 BV and based on the Gordon Growth Model with the following assumptions: 21% ROE, 11% long-term growth and 15.3% cost of equity. While Danamon 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.