PT Bank Danamon Tbk Disappointing Results - AAA

BDMN net profit in 1H11 was only up by 3% due to squeezed margin. Fully loaned up funding coupled with challenging growth in two-wheelers (2W) financing may lead to only modest bottom line growth going forward. Further, with the upcoming rights issue, we expect ROE to be lower. HOLD.

± Squeezed Margin Due to Lower NIM and Higher Cost of Fund
BDMN posted 1H11 net profit at Rp1,473 bn, only increased 3% yoy, -7% qoq. This earning figure represented only 41% of our full year estimate. Profit before tax declined 4% yoy, 8% qoq. The main reasons for BDMN’s 1H11 weak performance were margin compression, higher provisioning expense and higher cost of fund. NIM was depleted from 11.6% in 1H10 to 9.8% as yield on assets was down by 130 bps to 15.5%, due to stiffer competition in lending. The cost of fund increased to 5.7% from 5.4%, which in our view was resulted from BDMN’s high LDR at 111%. One of the risks of fully loaned up funding is the higher cost of managing liquidity. Meanwhile, BDMN loan in 1H11 has increased by 31% yoy while third fund deposits grew 23% yoy.

± 2W Sales Could Face Significant Challenge Due to Higher Down Payment
Currently, around 40% of BDMN’s loan portfolio is contributed by Adira, of which 66% is 2W financing. Going forward, the growth in 2W financing will be somewhat slower as the Central Bank is going to impose higher down payment on 2W credit to reduce credit risk. It should be noted that in the 2W financing, the increase in the down payment has more negative impact on the sales than the increase in interest rate. In the previous 1Q11, Adira’s margin has already started to decline. We believe this trend will continue to the end of 2011 with slightly higher NPL and higher debt portion that will result in only a slight increase in BDMN net profit of 2% yoy.

± Valuation: HOLD. Downgrade TP to Rp5,800
Following the above results, we decrease our FY11 upper and bottom line figures, resulted in lower TP of Rp5,800 (from Rp6,500 previously). Our TP implies 2.4x PBV FY11F, which is equivalent to BDMN’s 3 year historical PBV. Currently, the bank is traded at 2.2x PBV, or less than 10% potential upside. HOLD.