A strong capital base will underpin growth
We raise our TP to Rp3,600 as Bank Danamon stands to record sound profitability on the back of sustainable loans growth with the new management now in place. In particular, the bank will be able to leverage on its multi-finance subsidiary Adira to extend new loans, supported by a strong capital base. Post rights issue, we lower our FY09-10E EPS estimates by 52%. Nonetheless, Bank Danamon remains our top pick in the banking sector. Our new TP offers 30% potential upside and implies 2.3x-2.1x FY09-10E PBV and 17.9x-12.9x FY09-10E PER, or slightly above its 5-year historical trading range.
No more speculative derivative transactions
The management said that it had put an end to speculative derivative transactions. This is a positive move which lifts governance concerns in our view. Thus, the provisioning shall be limited to Rp1.8trn in 2009 (assuming 104% coverage) in our estimates. This provisioning is mainly to cover rising NPLs from ordinary lending activities rather than speculative derivatives. The bank will now focus on asset quality, we believe. Thus, loan growth is likely to slow - but to a still respectable 11% this year - with consumer financing accounting for the bulk of the new loans. But as the lending rate on the consumer loans is an astounding 32%, these loans shall make a major contribution to the bank’s excellent NIM of 10.5% - the highest in the industry by far. While we may see a pause in aggressive loans growth this year, with internal consolidation quite likely, we still expect BDMN to post strong loans growth of 19% 3-yr cagr.
Easily passing the stress test
Our stress test assumes 5% additional NPLs at either 100% or 200% coverage. Post rights, we estimate the CAR to hit 17% - even assuming 11% loans growth and repayment of US$300mn sub-debt. Under our worst case scenario at 200% coverage, the bank’s CAR would only drop to 14.2% and only Rp700bn would be needed to bring the CAR to 15%. Note, however, that our test does not include an additional 20% stake in Adira that BDMN is hoping to purchase by late June. But even if it did, the CAR would only drop to 12.8% - still pretty high in our view.
Not a great 1Q09 - but the worst is now over
The 1Q09 results are out this week. We don’t expect great results with negative loans growth QoQ – although the NIM is still expected to stay at a very high 10%. As for the net profits, we expect them to fall by more than 20% YoY on higher opex and greater provisioning to account for loans to SEMM (loans to traders in traditional “wet” markets). NPLs, meanwhile, are likely to increase to about 3% in 1Q09. Nonetheless, despite this unspectacular performance we firmly believe that the worst is now over. A decline in the coverage ratio from a normal level of 160% to around 120% in 1Q09 suggests the company is upbeat in regard to extending new loans going forward. And efficiencies will come from lower headcounts – we expect the cost to income ratio to fall to 52% from last year’s 55%.
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