Jan 11, 2017 10:53:15

Bank Mandiri: Waiting For The Improvements To Come

We reiterate our NEUTRAL call and GGM-derived IDR11,600 TP (3% upside) on Mandiri because we believe the share price performance remains capped by investor concerns over asset quality improvements. Additionally, its strategy to push consumer lending as its main growth engine, aside from the corporate segment, is also challenging. This is as other banks are more aggressive in offering attractive lending rates and with faster approval times. As such, we expect consumer lending to grow by 8.8%, ie below our 12.4% total loans growth projection for this year.

¨ NPLs remain the main concern, given Bank Mandiri’s (Mandiri) substantial loan book size. Nov 2016’s monthly provisions of IDR2.5trn (11M16 total provisions: IDR18.9trn) also suggest that Mandiri is still at an internal consolidation phase and needs more time for asset quality improvements. All in, we forecast anLLC ratio of 140.9% by end-2017, which should provide an ample buffer if the NPL ratio is higher than our 3.1% forecast.

¨ A challenging landscape to grow consumer lending, in our view. This is despite the regulators relax their policies (ie lower down payments and policy rate cuts totalling 150bps) and the Government’s ongoing tax amnesty programme. For vehicle ownership loans, Mandiri faces close competition with other banks and multi-finance firms like Bank Central Asia (BCA) (BBCA IJ, NEUTRAL, TP: IDR17,600) and Adira Dinamika Multi Finance (Adira Finance) (ADMF IJ, NR). The mortgage segment is also a tough market, given peers like Bank CIMB Niaga (CIMB Niaga) (BNGA IJ, NR) and Bank Permata’s (BNLI IJ, NR) aggressive strategies that include lower lending rates and faster approval processes. As such, we expect Mandiri’s consumer lending to grow by 8.8%, ie below our total loans growth of 12.4% for this year.

¨ High magnitude from wholesale depositors. With a 3.3% cost of deposits in 3Q16 (3Q15: 4%) – and a relatively stable customer deposits breakdown between the wholesale and retail segments – we opine that wholesale depositors still have higher bargaining positions when it comes to preferential rates. Furthermore, the time deposit (TD) composition between retail and wholesale is also quite stable. This indicates the stickiness of Mandiri’s wholesale TD rate amid the tight liquidity situation within the system. All in, we project 3% cost of deposits for FY17 (FY16: 3.4%).

¨ Maintain NEUTRAL and a IDR11,600 TP. We maintain our NEUTRAL call and GGM-derived IDR11,600 TP on Mandiri. This assumes:

i. 9.3% cost of equity (CoE);

ii. 12.9% sustainable ROAE;

iii. 3% long-term growth.

Our TP implies 1.6x 2017F P/BV, ie below -0.75SD from its historical mean). The upside and downside risks to our call are a higher number of government infrastructure projects, a lower-than-expected blended cost of funds (CoF), slower-than-expected assets quality improvement and soft GDP growth that would dampen loans demand, particularly for corporate lending. (Eka Savitri)