Bank Mandiri; Nudged up by recoveries; ; Rp7,150; TP Rp7,100; BMRI IJ - DBS Vickers

At a Glance
· Excluding recoveries from Garuda, 1Q11 net profit was 22%/23% of our/consensus estimates
· Garuda recoveries of Rp1.1trn was booked in 1Q11
· 5.3% NIM target appears challenging at this stage but BMRI has set strategies to achieve this
· Maintain Hold and Rp7,100 TP

Comment on Results
1Q11 net profit came in at Rp3.8trn including the Rp1.1trn recoveries from Garuda. Excluding these recoveries, 1Q11 results were within expectations. NIM was lower at 5.1% due to a significant decline in FX loan yields (from 7.2% in 4Q10 to 5.1% in 1Q11). Loans grew 1.7% q-o-q driven by consumer and micro loans. Meanwhile, deposits shrank by 2.6% due to seasonality. NPL ratio inched up to 2.6% mainly due to the downgrade of a corporate loan to non-performing. Total CAR inched up to 18.5% after accounting for the Rp11.5trn rights issue, which was completed in Feb-11.

BMRI targets NIM of 5.3% for FY11. While it appears challenging at this juncture, BMRI stated that they will continue to leverage on its transactional banking platform and business banking base (to gather more CASA) to keep cost of funds low as well as leverage on its growth for higher yielding loans (micro and consumer). BMRI could also gear up its loan-to-deposit ratio, which currently stands at 70% from the excess liquidity it carries in its balance sheet.

Recommendation
Maintain Hold and TP at Rp7,100. Our TP is based on Gordon Growth Model assuming 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 debts cuts on state-owned enterprise loans. The proposal is pending Parliamentary approval.