NISP BMRI Inline 2008 Results

Bank Mandiri booked a net profit of Rp5.31tn in 2008, up by 22.3% YoY from Rp4.37tn in 2007, and was inline with our estimate at 98.6% of our full year forecast of Rp5.39tn.
• The increase in net profit was attributable to the 19.5% YoY increase in net interest income amid 26% YoY increase in loan growth to Rp174.5tn and improvement in asset yields from higher interest rate environment. In addition, the 37.2% YoY growth in non interest income on the back of higher fees and commissions as well as forex gain played a role in profit growth despite higher provision charges of Rp2.60tn (+49.1% YoY).
• On a quarterly basis, net profit was relatively flat at Rp1.36tn (+1.1% QoQ) as higher operating expenses and tax expense offset the 7.0% and 44.8% QoQ growth in net interest income and non interest income respectively. This was also despite lower provision charges that declined by 15.7% QoQ to Rp796bn.
• Tax rate in 4Q08 was significantly higher at 42% as the company wrote off Rp5.5tn loan that was not tax deductible.
• Despite its ability to garner third party fund, especially during tough environment in 2H08, Bank Mandiri’s deposit franchise was not as sticky as originally expected since its low cost fund deteriorated to 56.7% in 2008 from 64.0%
in 1H08 as customer shifted its saving to time deposit. This highlighted the potential of further increase in funding costs in term.
• In the mean time, the bank indicated that it expects further deterioration in loan quality in 2009F, but so far in 1Q09 it has been less severe than expected, although the bottom is not expected until 2Q-3Q09. In addition, despite some downgrade expectation, the bank also suggested some possible loan quality upgrade on two of its big debtors by 3Q09.
• Going forward, the bank highlighted a tougher operating environment in 2009F with loan growth of only 16-19%, which is inline with our 18% estimate.
• The bank also hinted possible lower dividend payout ratio, if approved by shareholders, at 25% versus the usual 50% in order to strengthen its capital base.
• At current price, Bank Mandiri is trading at 2009F P/BV of 1.3x and PER of 7.1x. Despite the recent rally in the stock price, we believe the stock still provides some value, and thus we maintain our Buy recommendation.