TP raised to Rp6,600
We have raised our FY10-11E EPS estimates by 4-15% due to: 1) a lower COF stemming from BDMN’s plans to reduce its proportion of high cost deposits and 2) higher loans growth assumptions. For the bank to attain sustainable loans growth going forward, we believe the key lies in its ability to build up high yielding assets - be it through maximizing its DSP (Danamon Simpan Pinjam) network, channeling loans to Adira, or by offering innovative products. Accordingly, we have raised our TP to Rp6,600 from Rp3,600 previously, assuming a lower cost of equity of 16% from 20% previously. Our new TP implies 4.2-3.9x FY09-10E PBV. This is at the high end of its historical trading range. However, we believe it is justified given the bank’s robust NIM, strong loans growth, cost turnaround and large capital base.
A shift in strategy: reducing its COF
What really excites us is BDMN’s desire to reduce its proportion of high cost deposits. Low interest rates have already reduced BDMN’s COF by 50bps as of April 09. And a reduction in the proportion of time deposits will cut its COF further to about 7% by YE09 and to 6% in 2 years, in our estimate. This does not mean that we expect a decline in the amount placed in time deposits, but rather that there will be an increase in the amount placed in current and saving accounts (CASA). However, this will take time - most probably about 3 years. As for the increase in CASA, we expect it to come from: 1) the bank capitalizing on its DSP units, where lending (rather than taking deposits) has been the focus, and 2) the offering of more innovative products. The latest product launched is Danamon Lebih, a product which gives free insurance and 5% cash back to depositors. The results are highly encouraging and 500,000 customers have been added in 6 months (normally, we could expect the bank to add only 100,000 customers in a year!). Overall, we expect BDMN to reduce its proportion of time deposits by 5% over 3 years.
Strong loans growth ahead
Our 1-2% upward adjustment to FY10-11E loans growth reflects 4-6% consumption growth over the next 2 years, supported by a Rp50trn fiscal stimulus next year, of which 80% is for tax purposes. This, combined with benign inflation of 6-7% and lower interest rates, should boost consumer loan demand, in our view. Since 50% of the bank’s total loans are consumer loans, we are confident that total loans growth can be sustained at 20% p.a. over the next 3 years. Consumer loans alone are expected to grow 27% p.a. over the same period. In our opinion, the key lies in the bank’s ability to maximize its DSP network (some 1,000 units) and, more importantly, to channel loans through Adira. With high exposure to consumer loans, the bank’s NIM should be maintained above 10% over the next 2 years, or well above that of its local peers. This will translate into strong profits growth.
2Q09 preview: looking good
Total outstanding loans as of April were around Rp62trn, or 7% lower compared to Dec 08’s Rp67trn. Yet the indications for loans growth in 2H09 are much better. However, for now, we still stick with our 2009E loans growth assumption of 11%. In 2Q09, we expect the bank’s profitability to remain sound with an excellent NIM of at least 10% reflecting our expectation that BDMN’s lending rate remains unchanged at an average of 16% and in addition the fact that its COF has already declined by 50bps as of April 09 to 8%. Note that the lending rate tends to be sticky given that BDMN’s mass market loans typically have a tenor of around 3 years with an average duration of 18 months. In regard to provisioning, the amount booked YTD remains at 2.5% of average loans, or in line with our estimates so far.
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