RHB Indonesia Morning Cuppa - 26 September 2016- (Bank Mandiri)

Good morning,

Bank Mandiri : Is The Worst Already Over?

Maintain NEUTRAL on BMRI with a new IDR11,600 TP (from IDR10,100, 1% upside) as we rollover valuations to 2017. We estimate asset quality to continue being the main challenge for the next three quarters, given the bank’s prior aggressive commercial lending expansion. As the new management is refocusing its strategy to the corporate and consumer segments, we believe this will result to asset yield and NIM compressions. Thus, we expect asset yields/NIMs to dip to 8.4%/5.7% next year from 8.8%/5.9% respectively in FY16.

♦ Assets still not in good shape .Our concerns that Bank Mandiri’s (BMRI) asset quality will only improve in 1Q17 at the soonest were confirmed when it booked a 3.9% gross NPL ratio in June (March: 3.2%) – mainly on the commercial lending segment. At the same time, LLC ratio dropped to 112.3%,ie the lowest since 2008. This should be an indication that BMRI still needs to allocate significant provisions in 2H16 to maintain its LLC ratio at a minimum level of 130%, in our view. Thus, we forecast for gross NPL ratio to touch 3.5% and then fall to 3.1% with credit costs of 260-219bps in 2016-2017 respectively.

♦ Refocusing more towards corporate and consumer lending. With commercial lending as the main reason for the lower asset quality, BMRI’s new management has decided to shift its loan strategy to the corporate and consumer segments. As the bank is experienced in the former, we expect this segment’s contributions to total loan book to gradually increase to 38.2% by the end of 2016, and then pick up to 39.2% by end-2017. For consumer lending, we assume a notable pick-up starting next year and, thus, anticipate a 13.9% growth for 2017. This is on the back of the full impact from Bank Indonesia’s recent relaxation of its loan-to-value (LTV) policies.

♦ Expecting lower NIMs. Despite the corporate loans segment’s lesser risks, it also has lower loan yields vis-à-vis other loan segments. This was seen in 2Q16 when loan yield fell27bps from the previous quarter. This was as the loan growth had been mostly supported by the corporate segment (+10.6%QoQ). Having said that, we project for loan yields to decline 59bps, which will result in an 8.4% asset yield in FY17.This is on:

i. The new focus towards the corporate loans segment;

ii. Our economist’s expectations of a 50bps 2017 total policy rate cut, which should translate into a faster downward adjust on BMRI’s loan yields.

All in, assuming blended cost of funds of 2.9%, we expect 2017 NIMs at 5.7%.

♦ Maintain NEUTRAL, with a new IDR11,600 TP (from IDR10,100).We maintain NEUTRAL with a new IDR11,600 TP as we roll-over our valuation to 2017. We derived our GGM-based TP by assuming 12.9% sustainable ROEs, 9.3% cost of equity and 3% long-term growth. Our TP implies 1.57x P/BV for 2017. The downside and upside risks to our call are faster-than-expected improvements in asset quality, lower-than-expected credit costs, higher-than-expected loan growth and stable NIMs despite lower loan yields coming from bigger contributions from corporate lending. (Eka Savitri)

Link to report: Bank Mandiri : Is The Worst Already Over?

Link to Daily report: Indonesia Morning Cuppa - 260916