Equity Research

PT BANK MANDIRI (PERSERO) TBK 

2Q19 NPL Improvement

BMRI’s NPL continued to improve in 2Q19 became to the level of 2.6% thanks to its NPL improvement from SME and consumer segments to the level of 2.09% and 2.54%. Currently, BMRI share price has increased by 7% YTD 2019 and traded at its 5 years average forward PBV of 1.78x while our fair value offer 13% upside potential, hence, we call Neutral on the counter.

2Q19 declining net profit but NPL continued to improve

BMRI posted a declining in 2Q19 net profit of 12.9% QoQ reach to Rp 6.3 trillion (vs Rp 7.2 trillion in 1Q19) which was due to 1) its muted growth of NII (+0.6% QoQ) and fee base income (+0.4% QoQ); 2) higher CoF mainly came from higher time deposit rate; and 3) higher than expected provision allocation of 25.3% QoQ to Rp 3.5 trillion (vs Rp 2.8 trillion in 1Q19). Meanwhile, the company’s NPL continued to improve in 2Q19 became to the level of 2.6% (vs 2.7% in 1Q19) thanks to its NPL improvement from SME and consumer segments to the level of 2.09% (vs 2.54% in 1Q19) and 2.54% (vs 2.60% in 1Q19) backed by a total write-off of Rp 2.01 trillion and Rp 7.3 trillion in restructuring loan. We highlight that a downgrades of Rp 1.4 trillion commercial loan into NPL category in 2Q19, mainly came from manufacturing and retail trading sectors, thus resulted in NPL’s commercial segment deterioration to the level of 10.7% (vs 10.5% in 1Q19).

Loan grew 9.5% YoY below the industry

During the 1H19, BMRI’s loan grew by 9.5% YoY attaining to Rp 835.1 trillion (vs Rp 762.5 trillion in 1H18), lower than banking industry growth of 11.1% YoY (as ofMay 2019)sincethe company’s LDR has increased to 99.0% in 1H19 (vs 94.9% in 1H18 and 95.5% in 1Q19). This was in line with the fact that banking industryliquidity has reducedas a consequence of lower customer deposit growth of 6.3% YoY which resulted in higher LDR’s industry of 95.5%(as of May 19, vs 93.1% in 1H18 and 94.3% in 1Q19). We note that the company’s customer deposit only grew by 5.0% YoY from Rp 803 trillion in 1H18 to Rp 843.2 trillion in 1H19.

Maintained to record 1H19 inline result

Despite 2Q19 weak performance, the company was still able to record a good 1H19 financial performance in which the NII and net profit grew by 8.9% YoY and 11.1% YoY attained to Rp 28.8 trillion (vs Rp 26.5 trillion in 1H18) and to Rp 13.5 trillion (vs Rp 12.2 trillion in 1H18), respectively, thanks to an increases in averageassets yield rate by 50bps and provision cost decline by 21.3% YoY. In all, BMRI’s 1H19 NII and net profit figures came in line with our expectation, which were covered by 47% and 49% to our 2019 forecast of Rp60.8 trillion in NII and Rp27.4 trillion in net profit.

Neutral Rating - fair value at Rp8,900/share

Responding to the BI 7-days RR cut by 25 bps, we revise our Risk free rate assumption from 8.43% to 7.00% which result lower WACC assumption to our DDM calculation. Hence, we obtain new fair value for BMRI at Rp 8,900 per share (previously at Rp 8,350 per share), implying 1.92x PBV 2020F target and close to its 5 years average forward PBV + 1std dev of 2.05x. Currently, BMRI share price has increased by 7% YTD 2019 and traded at its 5-years average forward PBV of 1.78x. Neutral rating on the counter.

Key catalyst: BI 7-days RRR cut and easing in minimum reserve requirement will further to boost loan growth

Key risk: Bad debt from Duniatex with total exposure of Rp 2.2 trillion will threat the company NPL and higher provisioning allocation in 2H19.