PNBN:Risk of narrowing NIM - Mandiri

Even though PNBN’s loans growth is projected to remain high in the future, we foresee a threat of lower NIM due to tightening liquidity position in the sector which will push the bank to offer higher TD rates, while at the same time BI’s initiatives to reduce lending rates will lead to a lower loan yield. We therefore maintain our neutral stance on the counter.

Strong loan growth is expected to continue … For the past two years, PNBN recorded higher- than- commercial banks’ loan growth. The bank expects this trend to continue this year with projected loan growth of 25% yoy, which will still mainly be extended to the consumer and commercial segments. The bank expects its market share in the commercial segment to increase from currently 7% to around 9%.

.. supported by strong growth in deposits. Such strong loan growth was supported by the rise in total deposits. Please note that the bank’s growth in deposits has been consistently above the industry's performance for the past four years. This year, the bank targets deposit to grow slightly below that of loans, hence the minimum LDR requirement of 78% will likely be achieved.

Worsening asset quality... PNBN reported higher NPL of 4.4% at end 2010 from 3.2% at end 2009, or an increase of 87.0% yoy in terms of absolute amount. The management claimed this increase came from 4 corporate debtors. Furthermore, the bank also wrote off around Rp462.9 bn of bad assets in 2010, which came from commercial and corporate debtors. Targeting its corporate loans to second-tier type of corporate customers (as the first-tier corporate customers will likely be served by five largest banks in Indonesia), the bank is basically prone to lower asset quality. This has been reflected on increasing NPL from corporate loans in 2010. As restructuring process in currently ongoing, we expect NPL to decline to 3.3% at end 2011.

Threat of lower NIM in the future. As BI rate is projected to increase, PNBN will have its cost of funds increasing, in our view, as over 50% of the bank’s funding is in the form of time deposits. Meanwhile, BI’s initiatives to reduce lending rates and tighter competition in the commercial segment will push the bank to cut its lending rates which will hurt its yield on earning assets. Consequently, NIM is projected to decline to 4.6% in 2011 from 5.0% in 2010.

Maintain neutral. We slightly downgraded our earning forecast for the bank to take into account higher interest rate and more competitive environment. Despite that, we maintain our TP of Rp1,200/share for the bank, thus our neutral recommendation.