Bank Mandiri, Banking on Its Core Strengths

A good combination of variables to move forward
BMRI is our top pick for the banking sector as it is well-positioned going into 2012. Its key strengths include: (i) a liquid balance sheet gives the bank ample room to disburse loans, (ii) an impressive deposit franchise growth enables it to manage its cost of funds, and (iii) its relatively ample capital, steady asset quality and reasonable valuation. We rate BMRI a BUY with a Target Price of IDR9,000, which implies a FY12f PER of 14.6x or P/BV of 2.9x. Key risks facing the bank include rising NPLs for non-corporate loans and high foreign ownership, as it is an anchor bank.

To maintain robust loans growth pace
Credit growth has been robust (28% y-o-y) across all segments and the interest income growth from loans has been healthy (9M11: 18% y-o-y). Although we think that loans growth, in general, faces downside risks on the back of a softer GDP growth, BMRI is equipped with a liquid balance sheet (79% LDR) and will likely participate in the funding of large-scale projects, such as the Government’s infrastructure loans. This will ensure a strong credit growth – which we expect to hit 22% in FY12 – momentum for BMRI.

A serious push in deposit franchise
After adding almost 2,500 new ATMs YTD, BMRI now boasts a ATM network of almost 9,000 across the country, surpassing BBCA as the bank with the largest ATM network. BMRI continues to expand its physical branches and micro outlets, and the finalisation of the agreement to connect BMRI’s ATM network with BBCA’s will have positive impact on its CASA franchise – which is already seeing massive progress (CASA grew 21% y-o-y with its CASA deposit composition of 59% being the highest since 2Q08). This will assist BMRI in lowering its cost of funds (now at around 4.1%), which will in turn support the case for NIM expansion.

Good news from non-interest income side; asset quality manageable
Core fees and commissions grew 27% y-o-y (18% of operating income) on robust growth in administration, subsidiaries, transfer and credit card fees. These are likely to grow as BMRI presses ahead with its deposit franchise. As the icing on the cake, BMRI’s gross NPL ratio has never exceeded 2.7% in the last seven quarters.