Indopremier BMRI - BUY TP Rp 6700 Remain Positive

Given soft NPL level going forward, lower provisioning, well capitalized, strong momentum loan growth, we believe Bank Mandiri will continue to deliver improving ROE from 11% in 2006 to 23% in 2010F which has resulted in higher TP of Rp6,700 (previously Rp5,900).
Relax Provisioning Lifted Up Earnings 43% YoY

Bank Mandiri first-quarter 2010 results was up 43% YoY to Rp2.0 trillion due to growth on operating income (+24% YoY) at Rp1.5 trillion and lower provisioning charge by 50%. The result fueled 24% of our initial forecast for FY10F. Latest data results from Danareksa Institute Research showed that consumer confidence index (CCI) for the month of April stable at 86.8%. The two components which built CCI came in mixed results, current condition index down 80 bps to 67.4% but expectation index up 50 bps to 101.4% signaling high possibility of upward adjustment on benchmark rate which in turn positive for Bank Mandiri earnings assets yield. We see by the end of this year NIM could flip up to 5.5% assuming BI rate stands at 7% in 2010.

ROE Continues to Improve
Looking at QoQ basis, there were reversal of Rp420 billion in 4Q09 to additional provision of Rp691 billion much of this was due to the implementation of PSAK 50 & 55 which adopted from IAS 32 & 39. As such we estimate loan loss provisioning in FY10F will be 10% lower than FY09, sending net profit in FY10F higher than our initial estimate by 4% to Rp8.7 trillion. ROE also will improve from currently stands at 22.3% in 1Q10 to 23.3% in FY10F.

Well Capitalized and Least Diluted Effect on Right Issue
Bank Mandiri has well capitalized CAR ratio which stood at 17% with tier-1 ratio at 13.3%, a level of ratio that meet criteria to be an anchor bank based on Bank Indonesia regulation. Meanwhile we expect, right issue will occur at least in first-quarter 2011. Based on our estimation that assume exercise price at Rp3,250 and 7% new additional share release or equivalent with 2.3 billion shares, Bank Mandiri will get fresh fund of about Rp7.7 trillion. Moreover, with 40% floating rates, Bank Mandiri could enjoy discount on effective tax rate from 28% to 25%, which accretive to Bank Mandiri bottom line.

Valuation and Recommendation
Given soft NPL level going forward, lower provisioning, well capitalized, strong momentum growth, we increase our earnings estimation for FY10F/FY11F/FY12F by 4%/7%/24% respectively from our initial forecast. Hence increasing sustainable long-term ROE from 21.5% to 22.4% resulting in higher TP from Rp5,900 to Rp6,700. Our new TP implies 3.5x PBV and 16.1x PE FY10F. BUY.