DMG Research Bank Danamon 1Q10 results – in line with expectations (BUY)

Bank Danamon: Rp5,500 BUY (TP: Rp6,500)

1Q10 results - in line with expectations

In-line results. Danamon’s 1Q10 net earnings rose threefold QoQ or 88% YoY largely on the back of lower provision charges (-51% QoQ; +8% YoY) and prudent cost management (-17% QoQ; -2% YoY). The net profit is in line with our forecast (~24% of our full-year estimates) and consensus’ (26%).

Mixed but decent starting trend. Total loans only grew 2% QoQ and YoY however its core mass market business posted an encouraging 5% QoQ and 16% YoY growth. We expect other segments to catch up in the following quarters as economic activities pick up. Deposit shrank 4% QoQ or 12% YoY as time deposits matured hence the slight increase in CASA to 35%. Net interest margins inched down QoQ but remained high at 11.9% (4Q09: 12.8%; 1Q09: 9.6%). Discipline expense management drove cost-to-income down 7% QoQ, 8% YoY to ~50%.

Positive turnaround in asset quality. Absolute NPLs fell Rp256bn QoQ after seeing five quarters of sequential increase, taking gross NPL ratio down on QoQ basis to 4.0% (4Q09: 4.4%). Loan loss coverage improved to 90%. Mass market continues to form the majority of NPL (43%) but despite the increase in proportion in loan book (56% of Danamon’s loans book versus 49% last year), quarterly credit costs assigned to this segment only rose by 2% YoY. Underlying credit costs have also normalised to ~2.4% (4Q09: 5%). CAR remains high at 16.8% at the bank level or 19.7% on consolidated basis post-implementation of the first phase of Basel II.

Maintain BUY. Danamon has rallied 21% YTD but we believe there is still upside given the positive earnings trajectory. We maintain our earnings forecast and reiterate our positive conviction on Danamon as continued realisation of recovery will outweigh the relatively bearish sentiment on the counter. Our two-stage DDM-derived TP of Rp6,500 implies 3.12x 2010f BVPS or 19.0x 2010f EPS. 18% upside from current level.