Bank Danamon, Revival Under-appreciated

Advancing with renewed focus
We think that the consistent improvements in Danamon’s fundamentals since 1Q10 have been largely under-appreciated. Recovery in credit growth led by its core mass market operations, rising CASA base and improving asset quality have fuelled an upward ROAE trend, which should underpin valuation. Maintaining composure is key. We maintain our Buy rating, with a TP of Rp7,800, implying FY11 18.0x EPS / 3.4x BV.

Worries overdone
The bank’s high LDR has been isolated as its key negative, sparking anxiety over its cost of funds and in turn its sector-topping NIM prospects going forward. We think this has been overdone. Many seem to ignore the bank’s decent work on savings, which has grown by an average 7.3% q-o-q in the last six quarters.

Professional funding strategy also makes sense, remembering its Adira Finance business structure and the cost of doing this is getting lower. The growth outlook for the mass market space is exciting and NIMs tend to be more resilient here as well. We find it harsh to overlook Danamon’s fundamental revival and stress on NIM compression concerns.

What to expect in 2011
Credit growth should concentrate on Adira and DSP although the overall expansion could normalise from this year’s ~25%. CASA could break 40% as it is tilting its focus towards the liability side of the business and fresh funds could be raised for growth. ROAE may approach 20%.

Buy into the recovery; M&A angle is a unique propeller
Similar to BRI, Danamon’s equity Beta rose (from 1.43 to 1.49), which leads us to maintain our TP despite a lower risk-free rate. Solid performance could dispel market’s negative bias towards the counter and DBS’ acquisition rumour has proven to be a propeller for the stock price regardless of whether talk will materialise. Danamon is trading only at its historical mean and the recent share price weakness presents a buying opportunity. The risks are inflation shock, adverse NIM drop and rising volatility.