DBS Bank Mandiri: Buy; Rp5,000; TP Rp6,600 prev Rp6,000; BMRI IJ

All time high profit levels
At a Glance
• Results above expectation due to write backs from NPL upgrades to performing loans and write-offs.
• Raise FY10-11 earnings by 9-10% for lower provisions, lower tax rate (as guided) and stronger transaction fee income.
• Maintain Buy and upgrade TP to Rp6,600 (from Rp 6,000).

Comment on Result
4Q09 net profit of Rp2.5trn brought full year net profit to Rp7.2trn against our Rp6.7trn (cons: Rp6.4trn), driven by write backs during the quarter from NPL upgrades to performing loans and write offs largely from commercial and some corporate loans. This lowered gross NPL ratio to 2.8% while boosted loan loss coverage above 200%, placing BMRI’s asset quality position second best after BBCA. Pre-provision profit was inline. Loans and deposit growth were significantly stronger in 4Q09 bringing full year loan and deposit growth to 13.8% and 10.7% respectively. NIM remained strong at 5.5% for the quarter as cost of funds improved further while asset yield remained at 9.4%. BMRI now has a CASA to total deposits ratio of 59%. BMRI also saw its transaction fee income rise strongly during the year from enhanced infrastructure and innovative payment solutions. Separately, its Rp3.5trn sub-debt issuance in 4Q09 strengthened total CAR further to 15.6%.
Based on guidance on tax rates going forward at 25-27% (we have assumed 27%), lower provisions as well as stronger transactional fee based income, we raise our FY10-11 earnings by 9-10%. Management also indicated a ROE target of 25% to be achieved over the next 3-4 years.

Recommendation
Maintain Buy but raise our TP to Rp6,600 (from Rp6,000) based on the Gordon Growth Model (GGM) with implied 3.3x FY10 P/BV. Our GGM assumptions are 24% sustainable ROE, 10% growth and 14.5% cost of equity. Key catalysts to earnings include further debt resolutions, with Garuda being the clearest case. Other recoveries would be a bonus to BMRI. The addition 5ppt tax benefit from increasing BMRI’s free float to 40% (from 33% currently) could get protracted depending on the time taken for the necessary approvals, but nevertheless, would remain a positive catalyst to earnings when completed. BMRI remains our top pick.