BDMN: NIM erosion - Mandiri

While 2Q results are usually exciting for banks, this is not the case for Bank Danamon (BDMN). Net profit fell by 6.9% qoq to Rp710bn in 2Q11 despite 7.8% qoq growth in loans. The management claimed it as a result of tighter competition that pushed lending rates to fall. We therefore downgraded our earning forecast for the bank by 13.3% for FY11 and 8.5% for FY12. Rolling our valuation into 2012 led us to a new TP of Rp5,900/share (post rights issue), which was a decline from Rp6,300/share previously. Maintain neutral.

Lower loan yield… BDMN reported strong loan growth in 2Q11 of 7.8% qoq or 30.4% yoy, which was particularly derived from wholesale segment (+13.7% qoq or 33.3% yoy), SME segment (+9.2% qoq or 28.8% yoy) and mass market segment (+6.5% qoq or 36.5% yoy). Included in the mass market segment was loans booked by Adira Finance which grew by 7.8% qoq or 46.0% yoy. Despite such strong growth, tighter competition in the market pushed lending rate to fall. The lending rate for motorcycle financing, for instance, has been cut from 25% p.a in 1H10 to 22% p.a in 1H11. We estimate the average loan yield of 18.3% in 1H11, a decline from 19.8% in 1Q11, which caused NIM to slightly decline to 10.0% in 1H11 from 10.2% in 1Q11.

Improved asset quality, yet cost of credit rose. The bank’s NPL fell to 2.9% at end Jun11 from 3.0% at end Mar11. Yet, it is worth noting that the bank wrote off around Rp568.4bn of bad loans in 2Q11, an increase from Rp553.8 bn in 1Q11. This led to a higher cost of credit of 3.3% from 3.0% in 1Q11.

Lower TP, maintain neutral. BDMN will hold a 144-for-1,000 rights issue with offering price between Rp4,100-Rp4,800, translating into total fresh funds of Rp5.0 tn - Rp5.8 tn. CAR (bank only) is estimated to reach 16.98% post rights issue from 12.2% at end Jun11. We estimate that post rights issue, BVPS will increase by 6.0% - 9.2%, which is actually quite attractive. However, fierce competition will likely lead to lower ROAE, thus limiting organic equity expansion in the future. If this prevails, the need for another capital raising in a relatively shorter period is likely, which will expose investors to another dilution risk. We therefore lowered our sustainable ROAE assumption in deriving the bank’s target price from previously 21% to 18%, which coupled with 13.3% and 8.5% downgrade in earning forecast for FY11 and FY12, respectively, led to a TP of Rp5,900/share based on 2012F BVPS (post rights issue at Rp4,100/share). This is lower than our previous TP of Rp6,300/share. Maintain neutral.