Mansek BDMN:Improving, yet pressure remains

BDMN’s performance improved in 1H10, thanks to strong growth in the mass-market segment including the loan provided by Adira Finance. Even though we upgraded our forecast and TP for the counter, we maintain our neutral recommendation as rising SBI rates will give some pressure to the bank’s NIM.

Mass market segment was still dominant... BDMN reported strong loan growth of 10.6% qoq in 2Q10 to Rp70.4tn at end Jun10 (+16.0% yoy). Loans to the mass-market segment still became the largest contributor to total loans of 56.4% at end Jun10, with loans extended through Adira Finance posted the highest growth of 18.0% qoq in line with strong growth in motorcycle sales (+18.1% qoq). Adira Finance contributed 60.3% of the total loans to the mass-market segment or 34.0% of the total loans at end Jun10. Second largest contributor to the mass-market segment was loans to SEMM (Self Employed Mass Market) which accounted for 34.3% of mass market loans or 19.3% of the total loans. The bank targets loans to grow by 20% yoy to Rp72.7tn at end 2010, which will likely be achieved.

With NPL remaining sound. .. NPL from the mass-market segment remained low at 2.9% at end Jun10 compared with total NPL of 3.4%. Please bear in mind that for unsecured mass market loans, BDMN applies automatic writeoff for loans due more than 180 days.

.. yet impairment losses remained high. Despite low NPL, the bank still allocated high impairment losses, which we believed was largely derived from its strong growth in mass market loans. Additional impairment losses from collective approach was recorded at Rp671.7bn in 1H10, which was in line with the bank’s strong exposure to the mass-market segment (+17.6% ytd or equivalent to additional loans of Rp6tn).

Maintain neutral. We adjusted our forecast on the bank to incorporate 1H10 results. Even though we upgraded our forecast on the bank (thus our TP, as we are also rolling our valuation into 2011F), we are concerned with the possibility of lower NIM post an increase in SBI rates (expected to start in the 4Q10) given the bank’s funding structure which are biased toward high-cost deposits (the bank’s average cost of funds in 1H10 recorded at 5.4%, higher than the sector’s average of 4.4%). We therefore maintain our neutral ! recommend ation on the counter despite an upgrade in our TP to Rp5,500/share.