DBS Bank Danamon: Hold; Rp5,500; TP Rp4,800; BDMN IJ Turnaround seen

At a Glance
• 1Q10 annualised net profit was inline with consensus but above ours. Higher non-interest income was the key deviation.
• Asset quality on a clear improving trend but loan and deposit growth has yet to pick up.
• Maintain Hold and Rp4,800 TP.

Comment on Result
1Q10 net profit was driven by mainly lower provisions. Provisions were lower with the absence of the non-recurring provisions set aside for the foreign exchange forward contracts related to the defaults on derivatives contracts last year. Further improvements were seen in the cost of credit for auto finance and micro lending inline with the recovery on the macro front. Separately, there was a reclassification of acquisition costs for new business which is now deducted from interest income (previously from fee income) in line with the new accounting standards. In addition, there was Rp4bn gain on marketable securities booked in 1Q10. NIM remained robust at 12.6% despite the reclassification of interest income as part of the implementation of PSAK 50 and 55. NPL ratio has started to show a declining trend to 4.0% from 4.5% the previous quarter, while loan loss coverage stood at 102%. Loan growth was decent at 2% q-o-q while deposits continued to slide by 4% q-o-q mainly from lower term deposits.

With the implementation of Basel II, BDMN saw a 2%ppt negative impact on its CAR for operational risk charge which left its CAR at 19.7%. Excluding the operational risk impact, CAR would have increased to 21.5%.

BDMN plans to pay out 50% of its FY09 net profit as dividend subject to shareholders approval in the upcoming general meeting.

Recommendation
While BDMN’s NIM is the highest among peers and the worst is over for asset quality and provisions, it would need to improve its deposit franchise to ensure ROEs are comparable with peers. Maintain Hold with RP4,800 TP based on the Gordon Growth Model with implied 2.3x FY10 P/BV.