Maintain Overweight: We think significant downside risks have been discounted in Mandiri’s stock price, which is at 5.8x 2009E EPS, 1.0x NTA, with ROE forecast at 18-20%. This is the cheapest Indonesian bank within our coverage, reflecting market perceptions of its quality. Furthermore, we note that consensus estimates for its F09 and F10 EPS have been cut by ~20% over the past year – expectations are not high.
Asset quality stable: Asset quality has been admirably maintained through a tumultuous quarter when interest rates and exchange rate spiked, whilst liquidity, commodity and asset prices plummeted. Furthermore,Mandiri has had to deal with well-publicized exposures to some high-profile customers, who have run into cash flow difficulties. Gross NPL ratio at 4.7% in 4Q is up from 4.44% in 3Q, but well-below our expectations and down significantly from 7.2% at end-2007.
While we expect asset quality to deteriorate with a lag, the bank has beefed up its provision reserves to more than 120% of NPLs – and is better prepared this time, in our view.
Risk-focused: Over the past quarter (and 12 months), Mandiri has focused efforts on improving its liquidity,managing down FX lending (down 17% QoQ to US$3.3bn by encouraging customers to either repay or switch into rupiah loans), running stress tests, closely monitoring higher risk customers and intensifying restructurings. Management affirmed that they had not been involved in speculative derivative positions.
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