Bank Mandiri, the bad and the good - CLSA

Bret “THE POOL” Ginesky looked at Bank Mandiri (BMRI IJ). BMRI’s 1Q11 results came in at Rp3.8tn (+89% YoY) or 31% of our FY11 estimates. However, after adjusting for Garuda, the earnings were Rp2.7tn (+34% YoY) and 22% of our FY11 estimates. Reiterate BUY.

In his report, Bret identifies the bad and the good things going on with BMRI. Overall, the good far outweighs the bad. Re-iterate BUY with TP of Rp9,000.

Key points from the report:
THE BAD:
Negative impact from the 3mo T-bill replaces 3mo SBI as the reference rate for Recap bonds. Currently BMRI holds Rp76.3tn in variable rate bonds implying a -Rp687bn impact to net interest income and -4.2% to earnings, assuming 5.2% T-Bill rate for 2Q-4Q 2011. The question is how BMRI’s earnings are impacted if 3month T-bill rate moves lower than 5.2%. The sensitivity table below shows the impact on net profit.

THE GOOD:
BMRI’s core non interest income was up 29% YoY and core fee ratio increased to 21% of total revenues. Driver is a 38% YoY rise in fees and solid growth in other categories (+61%). Cross selling is the key.
It appears that the parliament is very close to approving a haircut provision for written off loans. Currently, BMRI has approximately Rp33.0tn (US$3.8bn) of written off loans, and with recoveries of 10-20% we anticipate this could be accretive to equity by Rp3.3-Rp6.0tn over a 2-3 year period.
Valuation: At 2.5x 11CL PBV, BMRI has additional upside as rising ROE is driven by PPOP expansion and credit quality improvements. We reiterate our TP of Rp9,000, representing 3.1x and 17x PBV and PE as we anticipate another re-rating is in the cards.