JP Morgan - PT Bank Mandiri Tbk.: Better-than-expected results; rerating driver remains in place: buy on dip

· 4Q profit 43% higher than consensus; buy on dip: BMRI’s FY09 net profit was higher than the most optimistic forecast on the street, at Rp7.15T. 4Q FY09 profit was 43% higher than our and consensus estimates. The stock fell 3.8% in trading ahead of results; we see the decline as misplaced and recommend that investors accumulate BMRI.

· 25% ROE target reiterated – re-rating driver remains in place: Management reiterated a medium-term target of a 25% ROE. We see an upward ROE trajectory as a continued re-rating driver, and maintain our OW rating. Our revised Rp5,700 (up from Rp5,425) Dec 2010 PT envisages BMRI trading at an unchanged 2.5x 12M Forward P/BV at the end of FY10, and hence could be exposed to upside risk.

· Forecasts revised 10-13% higher than consensus: Our new FY10-11E EPS numbers are 10-13% higher than consensus, and we expect revisions to exert upward pressure on the stock in the near term.

· 4Q results: Margins and provisions key areas of surprise: 4Q FY09 margins rose 45bp sequentially, with both the rupiah NIM (up 34bp) and forex NIM (up 68bp) improving q/q. Asset quality improved, as NPLs declined to a better-than-expected 2.7% of loans. Loan loss coverage improved to 231%, despite no new net provisioning, and absolute NPLs declined 23% q/q in 4Q FY09. Broad NPLs declined, indicating little pressure from pipeline NPL formation.

· Continuity is a key company-level risk: Mandiri’s Board of Directors’ term expires at the upcoming AGM, and we see management and strategic continuity a potential risk to our PT. Over a period of time, lower interest rates in Indonesia could be a negative factor for margins. New accounting policies on asset quality may be a risk to forecasts, although BMRI management does not expect a detrimental impact.