BMRI Boosted by ‘other’ operating income - DBS Vickers

At a Glance
• 4Q10 net profit of Rp2.8tr took FY10 earnings to Rp9.2tr; in line with our forecast but 5% above consensus
• Earnings were driven by ‘other operating income’, largely collections of written-off loans
• Full 2011 targets to be disclosed in 1Q11; may cut dividend payout to below 30%
• Downgrade to Hold, TP maintained at Rp7,100.

Comment on Result
4Q10 earnings were stronger due partly to collection of written off loans. ‘Other fee’ income was strong, especially from retail customers. Loans grew 6% qoq and 24% yoy (vs our 23% forecast), but NIM fell along with lending yields, although it
reduced expensive current accounts (usually related to SOE’s). CASA to total deposits ratio was stable at 57% vs. 3Q10. Focus remained on higher yielding loans (micro, small and consumer) that comprise 28% of total loans, with lending yields of 13-24% (micro loans the highest at 24%). Cost-to-income ratio inched up due to
continued investments in infrastructure and branch/outlet expansion. NPL ratio improved to 2.4%. Another Rp120bn provision was set aside for undisbursed loans as required by BI (BBCA had already provided for these in 3Q10). Provision writebacks
in 4Q10 were in lieu of adjustments arising from PSAK 50/55.

The variable bond repricing issue is still pending. We estimate that if BMRI’s variable rate bond portfolio is repriced to the 3-month SPN (from 3-month SBI) rates, FY11F earnings could drop by 8%. Preliminary 2011 targets include 20-25% loan growth, <3.5% gross NPL, and fee-based income growth of 20-25%. Full 2011 targets will be disclosed at 1Q11 result briefing at end Apr-11. BMRI has proposed below 30% dividend payout ratio, subject to approval. It expects Rp1.4tr write-backs from the Garuda IPO in 1Q11, even after accounting for mark-to-market losses of shares underwritten by Mandiri Sekuritas. Recommendation
Downgrade to Hold but maintain TP at Rp7,100. Our TP is based on 23% ROE, 11% growth, and 15.6% cost of equity, and implies 2.7x FY11 BV and 14.2x FY11 PE. BMRI could be re-rated if the government passes regulations to allow state-owned banks the liberty and flexibility to undertake bad debt haircut on state-owned enterprise loans. The proposal is pending Parliamentary approval.