Mandiri Sekuritas PNBN: Margin Pressure

Our latest visit to the bank confirmed improving performance for 2010, partly supported by high- fee based income. However, we remain concerned with the possibility of lower NIM going forward as SBI rates are projected to start rising in 4Q10. Therefore, we maintain our sell recommendation on the counter.

Strong loan growth to continue... PNBN is projecting a 30% yoy loan growth to Rp56tn at end Dec10, higher than the average growth of banks under our coverage of approximately 20% yoy. Please note that its loans grew by 10% qoq or 38.2% yoy in 2Q10, the highest in the sector. Commercial and consumer sector grew quite strongly by 12.6% qoq and 12.5% qoq in 2Q10 or 33.8% yoy and 48.1% yoy, respectively. The majority of the consumer loans was in the form of mortgage which currently yields around 11.5% p.a. !

.. and NIM is projected to reach 5.6%. With such strong loan growth, we expect NIM to reach 5.6% in FY10F. This will be higher than the NIM recorded in 1H10 of 5.2% due to full year impact of the new loans. However, it is worth noting that despite declining interest rate environment in 2Q10, PNBN’s cost of funding remained high at 8.5% in 2Q10, the highest in the sector. The bank seemed to have offered high TD rates to its customers during the period. This caused a declin! e in the bank’s NIM from 5.6% in 1Q10 to 5.2% in 1H10.

Unrecognized gain from the divestment of ANZ Panin Bank. PNBN is estimated to earn Rp300bn one-time gain from the selling of its 14% ownership in ANZ Panin Bank to ANZ Banking Group Limited. This transaction is currently awaiting for BI’s approval. Meanwhile, the bank’s fee- based income in 1H10 was very strong at Rp913.4bn (+63.4% yoy), thanks to gain from the selling of marketable securities. Such strong fee -based income has allowed the bank to build up its coverage ratio, reaching 136.4% at end Jun10 (vs 62.6%! at end J un09).

Maintain a sell. We adjusted our forecast on the bank to incorporate 1H10 results and latest development of the bank. Even though we upgraded our forecast on the bank for 2010F and 2011F (thus our TP, as we are also rolling our valuation into 2011F) , we remain concerned with the margin pressure in 2011F in line with the projected rising SBI rates. Given the bank’s funding structure which is biased toward high- cost deposits, a decline in NIM is inevitable, in our view. W! e therefo re maintain our sell recommendation on the counter despite an upgade in our TP to Rp1,050/share.