DBS Bank Mandiri: Seasonally slow quarter (Buy; TP Rp6,600; BMRI IJ)

At a Glance
• 1Q10 profit is 23% of our FY10F estimate; in line with market
• Seasonally slow loan and deposit growth, but expected to pick up in coming quarters; no change to our estimates
• Maintain Buy and Rp6,600 TP

Comment on Result
1Q10 net profit of Rp2.0trn (-20% q-o-q, +43% y-o-y) was supported by a marginally higher net interest income. Pre-provision profit was flat q-o-q. The weaker q-o-q earnings were due to write-backs booked in 4Q09 compared to normalized provision in 1Q10. NPL ratio improved further to 2.6% as loan loss coverage improved to 219%. Asset quality improved mainly due to a decline in corporate NPLs and upgrades to performing loans in all segments. Slower loan growth of 1.7% in 1Q10 and deposit contraction (-2% q-o-q) were due to seasonal factors. CASA to total deposit stood at 57.1% in 1Q10. Loan and deposit growth are expected to pick up in the coming quarters, so we are retaining our loan and deposit growth assumptions of 18% and 9%.
Loan growth is expected to be driven by consumer and small businesses, while micro lending is expected to gain further traction. NIM remained strong at 5.2% with lower cost of funds, but asset yields fell further, pressured by foreign currency loans. Rupiah loan yields remained resilient. BMRI’s transaction fee income continued to improve led by enhanced infrastructure and innovative payment solutions. Credit card fees fell on weaker retail sales possibly due to a seasonally slower 1Q. Operating costs were well contained with cost-to-income ratio at 40%. CAR remained robust at 16.0% after taking into account operating risk (ex-operating risk, CAR would be 17.0%).

Recommendation
Maintain Buy and Rp6,600 TP based on the Gordon Growth Model with implied 3.3x FY10 P/BV. Key earnings catalysts include further debt resolutions, with Garuda the clearest case. The additional 5ppt tax benefit that comes with a larger free float of 40% (from 33% currently) could be delayed, but would be a positive earnings catalyst when approved. BMRI remains our top pick.