Bank Mandiri TP Rp7,050

Saved by retail
While the lower yield on VR bonds may continue weighing on the bank’s performance this year, a better loan mix and funding composition will compensate for it, in our view. Against this backdrop (which we believe is more external than internal), we like the bank’s consistent efforts to grow its retail segment and strengthen its deposit franchise. We therefore maintain our outperform call on the bank despite heightened regulatory risk which may put pressure on the bank’s LT ROE, similar to other banks in the system.

Solid loan growth
BMRI was one among a few large banks whose loans grew very aggressively last year. BMRI’s loans grew by 28% YoY, claiming 14.1% market share in the system in 2011. Even though this year overall growth may slow to 20-22% YoY, retail loans will still grow higher, improving the bank’s loan composition more toward the higher-yielding segment. Retail loans are expected to contribute 32% of total loans this year from 30% at end 2011.

Yield on government bonds may have bottomed out The latest auction on the 3-month T-bill which yielded 3.1% gave hope that the yield has bottomed out from the 2.2% previously. We forecast the average yield to reach 3.5% in 12CL (a decline from 4.5% previously) and expect the negative impact to be compensated by a better loan mix and funding composition. It is also worth noting that the dependency on interest income generated from government bonds has significantly fallen over the past four years.

NPLs expected to remain below 3%
Despite indications of rising absolute NPLs in 2011, we expect NPLs to remain below 3% this year. BMRI will monitor exposure to the corporate segment, particularly related to commodity sector because of the volatility in commodity prices.

TP of Rp7,700 (9% potential upside) - maintain Outperform We tweaked our earnings forecast for BMRI by 4.4% and 1.1% for FY12/13 respectively, to reflect lower yield on government bonds which will partly be compensated by better loan mix and funding composition. We also reduce our TP to Rp7,700 to reflect heighten regulatory risks. Nonetheless we maintain our outperform call as we still like the bank’s well defined strategy to grow its high yield segment and strengthen its deposit franchise.

souce: CLSA dated 9 April 2012