Deutsche Danamon Alert - 2Q10 profit (and PPOP) growth slowing down TP 5100

We reiterate our HOLD rating on Danamon post its 2Q10 results release. Danamon booked 1H10 NP of Rp1.4tr, which represents a 65% yoy increase and ROAE of 19%. This accounts for 54% of our FY10F forecasts. The strong NP growth is primarily reflecting resurgence in the bank's loan growth of 15% yoy (vs only 2% yoy in 1H09) as well as the absence of Rp152bn derivative related losses. Normalised costs of credit increased marginally to 3.4% while NPL ratio is at 3.4% (down from 4.0%)
However, on qoq, despite a 10% loan growth, 2Q10 NP of Rp732bn rises by merely 4.5% as asset yields drop by 20bps to 16.8% on competition; while COF is flat at 5.4% - bringing NIM to 11.6% - a 10bps drop.

With LDR at 105%, it would mean Danamon may have to rely on more expensive funding to finance its loan expansions, which may compress NIM in 2H10. Already we heard increased competition on time deposits with some banks offering cash back, bringing effective time deposit rates above the agreed maximum rate of 7.0%. Not a surprise considering the industry's excess liquidity are only concentrated towards few banks. Also, we think BI's proposed LDR-linked reserve with reference LDR range of 75-105%
could potentially mean higher reserve for Danamon as its LDR is already at the upper range.