BNP Paribas - BMRI Lower provisioning ahead

􀂃 Non-performing loans to decline further, lower provisioning.
􀂃 2009 net earnings upgraded by 14.1%.
􀂃 Maintain BUY with a new TP of IDR5,500.

Lower NPL still expected
Bank Mandiri reported lower consolidated non-performing loans (NPLs) of 4.1% in September 2009 from 5.2% in June 2009. This is earlier than expected as we previously forecast 5.0% NPL to be reached by end-2009. A marked improvement was recorded in corporate NPLs, which declined to 4.5% in September from 6.6% in June due to some loan quality upgrade as well as repayment of NPL. Corporate loans account for 48% of the total loans. From 4.1%, the NPL is likely to decline further, and we expect this to reach 3.9% by December 2009 and 3.5% by 2010. Coverage ratio increased to 159% in September, the highest since 2004, and we expect at least 150% in the next two years.

2009 earnings upgrade on lower provisioning charges
Management guided towards small additional provisioning charges and expects up to IDR0.5t write-backs in 4Q09. We have adjusted our net consolidated provisioning charges expectation to IDR3.1t for 2009 from IDR4.4t previously. While we expect lower loan growth of 15%, compared with 17% earlier (loan growth was 16% y-y in September), the higher loan growth on micro loans (25% y-y in September) and small enterprises (21% y-y) should help improve margin in 4Q09 to 4.9%. All in all, we upgrade 2009 earnings by 14% but lower 2010 earnings by 2% on expected higher operating costs.

Forecasts yet to recognise write-backs
We are yet to recognise the collection from IDR3.4t loan exposure to Garuda Indonesia (GI), for which management expects IDR1.4t in mid- 2010 when GI goes public and the rest to be billed to the government. Altogether, we anticipate the bank to collect IDR2.55t net of tax from GI bad loans.

New TP of IDR5,500 – BUY
The higher equity base after the earnings upgrade is the reason for the revision of target price to IDR5,500 which is based on 2.9x P/BV 2009. Assuming the collection of IDR2.55t net of taxes from the exposure to GI next year, the target price will become 2.7x P/BV 2010E.