Deutsche banking sector

Couple of updates on Inndonesian banking sector
1. Mandiri - Small but faster growing subsidiaries (this report looks at Mandiri's key subsidiaries, whcih will become increasingly important driver to earnings)
2. Mandiri - Double its rights issue plan to US$1.6bn
3. BNI capturing more cash management businesses
4. Bank Jabar - Civil servant pay rise to drive up consumptions
5. others : Jakarta population exceeds 15-year forecasts - enhancing the case for infr projects


Summary:

1. Mandiri - Small but faster growing subsidiaries
Subsidiaries’ contributions increasing; maintain Buy; target price of Rp6,575 . This report looks at Mandiri’s main subsidiaries, which we believe could increasingly become major growth drivers of the bank’s operating income. Their combined contributions stand at 11% in 2009/1H10. Their three-year net profit CAGR is 60% vs. Mandiri’s 43%. We expect the subsidiaries to continue to deliver faster growth than Mandiri’s traditional commercial banking businesses, partly due to the less-competitive nature of their industries.

Faster growth industries In this report, we focus on Mandiri’s four key subsidiaries: Bank Syariah Mandiri, Bank Sinar Harapan Bali, Mandiri Sekuritas and AXA Mandiri. We will not be focusing on the recently acquired Mandiri Tunas Finance. We expect the four key subsidiaries to deliver more compelling growth profiles than the bank’s traditional commercial banking businesses. On our estimates, their combined three-year net profit CAGR would be 60% vs. the bank’s consolidated CAGR of 43%. Their operating income contribution would be 11.1% in 2009, up from 8.8% in 2006.

Less competitive businesses; (and/or still in infancy). We believe the subsidiaries’ more prolific growth profile may have been due to the less competitive nature of their businesses and/or the fact that their businesses are still in their infancy. For instance, in syariah banking, the industry’s syariah assets are still below 5% of total assets. Mandiri Syariah is the largest syariah bank. In the insurance business, based on the latest data from the Ministry of Finance (MOF), total assets were only Rp78tr in 2002, or 7% of banking assets, or approximately 5% of GDP.

Rp6,575 target price; risks: irrational lending competition, higher NPLs. Our TP is based on a Gordon Growth model (P/B=ROE-g/COE-g) Risks are higher NPL formations and costs and irrational lending competition. (See p.5 for details).

2. Mandiri to double the size of rights issues.
CEO has stated that it will double the amount raised in the bank's planned rights issue from approx Rp7tr to Rp13-14tr. The rights issue is scheduled to be on 11-13 December 2010 subject to parliamentary approval. The proposed new share issuance would be 10.13% of the enlarged capital, we estimate. We believe that the govt will subscribe to RI, and subsequently it will divest its RI portion, bringing public ownership to 40% (from 33%).In our view, RI is value enhancing to Mandiri. In this report, we have provided sensitivity analysis based on different rights issue pricing for a given new share issuance of 2.4bn new shares. Management has indicated that the pricing of the rights issues will not be at significant discount to the market price. Essentially, higher the rights issue price would translate into higher value enhancement. Eg, at right issue price of Rp5,500, the implied fair valuation would be Rp7,925 (refer to table below for details of sensitivity analysis).

3. BNI targets cash management business from corporates for Rp45tr (USD5bn).
The bank targets a +50% YoY growth from the Rp30tr cash they had under management in 2009. Up to Jun-10, cash management service under BNI has reached Rp36tr with 5,000-6,000 customers. A few major companies which have listed as BNI's cash management clients are BP Indonesia, Medco, Garuda Indonesia and Krakatau Steel. From the cash management business, the bank also aims to raise its fee-based income. (Investor) DB: BNI has seen its CASA market share declined to 10.2% in 1H10 (vs 11% in 2008) and cash management business is an alternative way for the bank to increase their portion of low cost funding.

4. Bank Jabar Banten - Civil servant pay rise to drive up consumptions.
West Java civil servants pay may rise up to +30% in 2010 - ahead of national average. The regional governments of West Java and Banten regions ("WJB") have allocated a pay-rise ranging from 10-30% in 2010. And in the government's latest draft state budget has indicated another average increase of 10% pay-rise for civil servants in 2011. These increase should normally include payment increases for pensioners of civil servants. Between 2006-2011F, total compensations to civil servants have risen by a respectable 5-yr Cagr of 16% - see chart below for details.

Rising consumption in WJB regions to propel BJBR loan growth further. Rising salaries of these civil servants (and pensioners of civil servants) will ultimately drive up consumption in West Java and Banten regions; and BJB will be one of the main beneficiaries. The bank has managed to capture 85% of the regions' civil servants as their consumer loans borrowers, where the segment makes up 75% of their loan book. It will also intensify its efforts to offer loans to pensioners of ex civil servants. So far, BJB has grown their overall loan book at +16% YoY; +9% YTD. Indeed the bank has typically seen loan growth acceleration in 2H10 and this latest development will definitely steer up the bank's loan book, making it closer to management's targeted 20-25% growth.

Maintain our BUY rating with a TP of Rp1,500. Looking from a strong set of 1H10 results, the company is ahead to beat our earnings forecasts (assuming no major new NPLs). The proceeds from the IPO in July 2010 of Rp1.4tr should further enhance the bank's earnings.