Danareksa Bank Danamon (BDMN IJ, Rp5,300 BUY) A journey towards profitability

Bank Danamon

A journey towards profitability


FY10-11E EPS tweaked; TP of Rp6,850
We adjust our FY10-11E estimates following the release of the 2009 results. Our loan growth estimate is trimmed to 21% from 25% previously to align it with the company’s guidance. Despite this, the higher NIM will help to compensate, as the bank’s admirable efforts to tackle its high cost funding shall result in a lower COF. While we also raise our cost of credit estimates, they are still an impressive 36% lower than 2009’s Rp2.9trn (excluding the one-off derivative charges booked in 2009). With its strong capital base (the CAR is estimated to reach 19% by YE10), superlative NIM of above 13% and the potential for strong loans growth post the balance sheet clean-up, BDMN remains our top pick in the banking sector. Our DDM derived TP is Rp6,850, implying 3.3x-3.0x FY10-11E PBV.

Tackling its costly funding
With the BI rate expected to be stable at 6.5% this year, we estimate the bank’s COF to decline by 120 bps this year and a further 10 bps next year. The bank has acknowledged its high cost funding problem and is determined to do something about it by increasing its low cost CASA to 40-45% of its total deposits over the next 3 years - an attainable goal, in our view. This year, we expect the CASA to reach 35% of total deposits – an achievable target through: 1) the further launch of innovative products and 2) infrastructure improvements – the bank plans to add another 200 ATMs from the less-than-1,000 it currently has. Maximizing its DSP to increase its CASA shall also help. As for the total deposits, we forecast 22% growth this year. The LDR at around 89% is still on the high side. Nevertheless, deposits are only 80% of the total funding with the rest coming from bonds and SBI.

And pursuing high margin business opportunities
A focus on low cost deposits aside, the bank shall continue to pursue high margin business opportunities - a strategy that shall keep the asset yield above 18% over the next 2 years, in our estimates. This strategy also helps to compensate for high operating costs and high business risks. The bank will tilt the loan portfolio toward the mass-market segment where the NIM is an astonishing 18-20%. We expect this segment to account for around 56% of total lending by YE10, in our estimates. Additional human resources will be required - a net additional 5,000-6,000 employees, the management said, although the bank still aims to keep its cost to income ratio around 50% – an achievable target given that sales people of mass market loans have an agreement to leave in 3 months if the performance is bad. What’s more, BDMN is extending its mass-market products - such as pawn-broking - where 100% of the loans are collateralized, and also looking for inorganic growth that may come from synergy with existing businesses.

Clearer earnings visibility
In its 5-year transformation journey, BDMN has increased its retail banking sales force, established a DSP network of 1,300 units, undergone re-branding in 2002 and 2006, rationalized branches and launched new products. Such will yield good returns this year. The NPAT should grow a staggering 81% YoY this year, with a ROE of above 20% in 3Q10. The NIM will remain high and even expand from 12% to 13%, in our estimates, as the COF declines. In fact, the NIM has been expanding since 2005 as the bank has increasingly focused on high margin business. The cost of credit will normalize at 2-3% of earnings assets with the NPLs declining to 3.1%. With its excellent profitability and commitment to tackling its operational costs, the 3-year NPAT CAGR is expected to reach 43%.