Net profit fell on rising provision expenses. Net profit in 1Q09 was down 30.1% yoy to Rp393b, represents 18.8% and 19.6% of our and consensus' 2009 estimations. The 79.8% increase in provision expenses due to rising NPLs was the major cause for the drop in net profit in addition to flat growth in net interest income.
Loan quality worsened with declining coverage ratio. NPL ratio rose to 3.0% as of end Mar 09 mainly due to the downgrade of one loan account in BDMN's wholesale segment with business in export trading. Even, with the 79.8% increase in provision expenses, the NPL coverage ratio fell to 92.4%.
Net interest income depressed by excess liquidity. Net interest income grew by only 2.6% yoy while fell by 3.2% qoq with NIM fell to 10.0% in 1Q09. This was caused by company's effort to retain liquidity by holding its loan expansion while on the other hand it tried hard to grow its third parties funds which mostly came from expensive time deposits. LDR fell continuously from 90.6% as of 30 Mar 08 to 83.5% at the end-Mar 09. The decision to increase liquidity was partly due to the urge to repay its matured sub-debt in Mar 09.
Our View:
Sluggish growth in net interest income to be temporary. We expect sluggish growth in net interest income to be temporary as the proceeds from the bank's recent right issue amounted around Rp4 trillion can be used to accelerate the loan growth again. Declining rate environment is also benefited BDMN as most of its funding, more than 70%, are in rate-sensitive time deposits.
Declining NPL coverage ratio is major concern during uncertain economic condition. With the possibility of NPL to increase further during uncertain economic condition, especially when its special mention loan also increased significantly from Rp5.4 trillion (8.3% of total loans) in 4Q08 to Rp7.8 trillion (9.7% of total loans) in 1Q09, we are concerning the bank's declining coverage ratio of below 100%.
Maintain SELL. We maintain our SELL call considering the bank's weakening fundamentals in the period of uncertain economic condition. BDMN is also trading at unattractive 2009 PE and PB of 10.9x and 1.4x compared to more profitable Bank Rakyat Indonesia's (2009 expected ROE of 27.8% compared with BDMN's of 15.7%) 2009 PE and PB of 9.3x and 2.4x
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