UOB BMRI 1H10: In-line results but shows growing momentum TP IDR 7.300

1H10Results
•1H10 results in line with our estimate. Bank Mandiri (BMRI) reported1H10 net profit of Rp4,034b (+38% yoy) and Rp2,030b in 2Q10 (+1.4%qoq).

•Growth momentum not fully reflected in 1H10 results. Net interestincome grew only 2.2% qoq despite stronger loan growth in 2Q10. NIMrose to 5.2% in 2Q10 (1Q10: 5.1%), driven by higher asset yield.Management believes its 2010 NIM target of 5.35% should beachievable on the back of:
-faster growth in high-yield assets (SME, micro and consumer grew12.9% ytd, and
-BMRI will benefit from the increase in interest rates whichmanagement expects in 4Q10.

•Loan grew 8.0% qoq. Loan growth was relatively flat (+1.7% ytd) in1Q10, hence 2Q10 loan growth (+9.8% ytd) showed a stronger trend inloan disbursement across all segments. Corporate loans grew 7% ytd in1H10, and we expect stronger loan growth from consumer and workingcapital segments going forward. We maintain our loan growth estimateof 25% for 2010.

•Gross NPL dropped to 2.33% in 1H10 from 4.78% last year. The declinein NPL was caused by the Rp539b write-off in 2Q10. About 53% of thewrite-offs were in the micro and SME segments amounting to Rp290b.Provision expenses increased 58% qoq, driven by increased NPLs in thecommercial and micro segments.

•Low-cost deposit (CASA) was relatively stable at 57%, while cost offunds was also stable at 4.0%, the same as in 1Q10. BMRI currently hasthe second-lowest cost of funds in the sector, and this will be sustainablewith the development its transaction banking infrastructure.

Stock Impact
•1H10 results showed a growing momentum. Bank Mandiri should beable to post a 25% loan growth as corporate loans are showing signs ofrecovery. At the same time, Bank Mandiri faces less interest rate risk witha large portion of its earning assets in liquid assets (assets with maturityless than one year or with variable interest rates). For instance, 98% of itsRp83.5t government bonds are variable-rate bonds.

Valuation/Recommendation
•Reiterate BUY. Mandiri is our top pick in the banking sector. We maintainour target price at Rp7,300, or 3.1x 2011F P/B, on the back of its: a)higher NIM, b) stronger franchise in transaction banking, c) strong growthopportunities from high-yield business, d) being the largest bank in thecorporate segment, and e) higher loan growth.