Bank Danamon; NIM pressures mounting; Fully Valued; Rp5,200; TP Rp5,500; BDMN IJ - DBS Vickers

At a Glance
· 1Q11 net profit comprised 22%/21% of our/consensus estimates
· Loan growth driven by mass market segment.
· NIM pressure persists as lower yielding loans grow and cost of funds pick up
· Maintain Fully Valued with Rp5,500 TP
·
Comment on Results
1Q11 net profit of Rp763bn was driven largely by lower expenses. NIM slid to 10.2% from a combination of higher cost of funds, lower loan yield and higher reserves set aside for regulatory requirements. Non-interest income was supported largely by loan-related fees. Expenses were higher from incremental costs related to additional ATMs and pawn brokerage related costs. Provisions were stable. Loans grew 4% q-o-q led by mass market segment (+6% q-o-q) comprising micro lending (+4% q-o-q) and auto financing (+7% q-o-q). SME lending picked up at 6% q-o-q, which is crucial for BDMN to tap on low cost deposit growth going forward. Deposits grew 2% q-o-q driven by time deposits. As CASA contracted, CASA to total deposits ratio declined to 37% (4Q10: 39%). As loan growth outpaced deposit growth, loan-to-deposit ratio improved to 105%. Adira will be issuing Rp2trn of corporate bonds in 2Q11 to fund growth. BDMN’s total CAR dropped to 14.8% in 1Q11 as operating risks stepped up and loan growth accelerated. A dividend payout ratio was set at 35%.

Recommendation
Maintain Fully Valued call with Rp5,500 TP, 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 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. Short-term pressures persist.