Credit Suisse: Bank Mandiri (Persero) (BMRI.IJ) - Transformation reaffirmed, OUTPERFORM

■ Transformation reaffirmed. BMRI’s robust FY09A reaffirms our view that its five-year transformation has given birth to solid fundamentals. BMRI delivered FY09 earnings 13% above consensus (8% above our forecasts), staging 18% YoY PPOP growth and a 35% YoY earnings jump. We tweak our FY10-12 earnings to reflect slightly lower than expected non-interest income and marginally higher than expected operating expenses in FY09A.

■ A force to be reckoned with. BMRI has delivered a strong transformation, cutting its gross NPL ratio from 26.6% in FY05A to 2.62% by FY09A, while provision coverage surged from 44% to 231% and ROE jumped from 2.5% to 21.8% during the same period. To date, BMRI has the second highest asset quality and provision coverage, the third highest profitability and second lowest LDR among the Indonesian banks under our coverage, implying the second highest growth capacity. We foresee BMRI delivering
the second highest five-year CAGR loan growth, ahead of all Indonesian banks under our coverage.

■ More potential for rerating. Despite its past rerating, we believe BMRI’s current share price does not yet adequately reflect the company’s fundamental strength. BMRI is still trading at a 25% and 62% discount to MSCI Indonesia and MSCI NJA Banks, respectively. We believe BMRI is well positioned not only to maintain its improved fundamentals but also deliver further upside, given its recent successful expansion into higheryielding assets and ever-strengthening cash management division.

■ Undemanding valuations. The large discount against MSCI Indonesia and MSCI NJA Banks, despite its fundamentals being stronger than its peers’, implies that BMRI’s share price still offers an attractive entry point. We maintain our OUTPERFORM rating on BMRI and target price of Rp5,900, implying 3.1x FY10E P/B and 13.6x FY10E P/E.