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Bank Mandiri (BMRI IJ) (Buy) - Lower risks to growth

Bank Mandiri (BMRI IJ) (Buy) - Lower risks to growth

Banks NS EW 475 26th Oct, 2024

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Lower risks to growth

Increase TP to IDR8,700, implying 23% upside

We took a closer look at BMRI’s provisioning expenses (12MMA CoC) which has stabilised at ~70-80bp in 1H24. While this has resulted in lower loan loss reserve (LLR) of ~3.4% (below the bank’s pre-pandemic LLR), we think this is justified given the fact that net formation rates for either NPLs or LLRs have been benign. Indeed, as depicted in chart below (Fig. 1) , both 12MMA for net NPL and LLR formation rates have shown sustained negative trends (i.e., improvements). Since 3Q21, quarterly net formations for NPLs and/or LARs have been negative – suggesting improving trends for both NPLs and LARs. Consequently, we believe that these may have been primary drivers for the bank’s relatively benign CoCs in 2023-1H24.

For these reasons, we have made some upward earnings adjustments on BMRI. Specifically, we have reduced our CoC assumptions to 80bp (from 120bp) in 2024F and 100bp in 2025-26F (from 120bp). While we have assumed more conservative funding costs (thus, lower NIM projections of 4.9-5.1% for 2024-26F – down from previous estimates of 5.0-5.3%), we have raised our earnings projections by 2.0-4.3% over 2024-26F. These have translated into higher ROAEs for BMRI to ~21-22% (from previously ~20-21%).

Post these earnings upgrades, we have raised our TP to IDR8,700 from IDR8,450. Key risks with these upgrades are trends in credit qualities. If we see deterioration in recently disbursed loans, these would translate into higher-than-assumed CoC assumptions. We have done some sensitivity assessments on changes in CoC. For every 10bp change in CoC, the impact to earnings is ~2.0%. For instance, a 10bp higher CoC than assumption would mean potential earnings downside risks of ~2.0%, and vice versa. 

Valuation and risks: We derive our TP of IDR8,700 (up from IDR8,450) using DuPont methodology, with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 1.03x (1.06x previously), and a CAR-adjusted ROAE of 20.0% (up from 19.8% previously). We also use 2025F book as reference. Our TP implies 2.5x FY25F P/B and 12.6x FY25F P/E – compared with the current valuation of 2.1x FY25F P/B and 10.1x FY25F P/E. Risks are worse-than-expected macroeconomic trends, government intervention, tight liquidity competition, and higher credit cost (due to worsening asset qualities) and higher opex growth.

Key data on Bank Mandiri

Profit and loss (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Interest income
126,762
146,266
152,878
167,695
184,679
Interest expense
-36,391
-48,257
-46,893
-50,789
-59,244
Net interest income
90,371
98,010
105,985
116,907
125,435
Net fees and commissions
18,802
20,148
21,417
23,559
25,915
Trading related profits
3,494
3,474
2,500
2,500
2,500
Other operating revenue
12,884
17,026
17,276
17,526
17,776
Non-interest income
35,180
40,648
41,193
43,585
46,191
Operating income
125,551
138,658
147,178
160,492
171,626
Depreciation
-3,418
-3,413
-3,612
-3,825
-4,038
Amortisation
0
0
0
0
Operating expenses
-25,227
-25,027
-26,097
-27,382
-28,759
Employee share expense
-24,642
-24,423
-25,137
-26,213
-27,493
Pre-provision op profit
72,264
85,794
92,332
103,072
111,336
Provisions for bad debt
-16,096
-11,153
-11,423
-15,706
-17,277
Other provision charges
0
0
0
0
Operating profit
56,168
74,642
80,909
87,366
94,060
Other non-op income
210
43
43
43
43
Associates & JCEs
0
0
0
0
Pre-tax profit
56,378
74,685
80,953
87,409
94,103
Income tax
-11,425
-14,633
-16,191
-17,482
-18,821
Net profit after tax
44,952
60,052
64,762
69,927
75,282
Minority interests
-3,782
-4,992
-4,992
-4,992
-4,992
Other items
0
0
0
0
0
Preferred dividends
0
0
0
0
0
Normalised NPAT
41,171
55,060
59,770
64,936
70,291
Extraordinary items
0
0
0
0
Reported NPAT
41,171
55,060
59,770
64,936
70,291
Dividends
-16,817
-24,702
-33,036
-35,862
-38,961
Transfer to reserves
24,354
30,358
26,734
29,073
31,329
Growth (%)
Net interest income
20.7
8.5
8.1
10.3
7.3
Non-interest income
9.0
15.5
1.3
5.8
6.0
Non-interest expenses
10.6
-0.8
4.3
4.9
5.0
Pre-provision earnings
22.8
18.7
7.6
11.6
8.0
Net profit
46.9
33.7
8.6
8.6
8.2
Normalised EPS
46.9
33.7
8.6
8.6
8.2
Normalised FDEPS
46.9
33.7
8.6
8.6
8.2
Loan growth
15.9
18.4
7.7
10.1
10.0
Interest earning assets
16.7
9.2
13.3
12.2
12.1
Interest bearing liabilities
16.5
8.7
12.1
11.4
11.5
Asset growth
15.5
9.1
11.9
11.3
11.4
Deposit growth
15.5
5.8
12.5
12.5
12.5
Source: Company data, Verdhana estimates
Balance sheet (IDRbn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash and equivalents
27,213
26,432
54,617
61,445
69,125
Inter-bank lending
0
Deposits with central bank
107,349
108,605
90,382
101,680
114,390
Total securities
412,012
403,729
573,076
666,225
773,716
Other int earning assets
143,110
110,461
91,735
109,303
129,329
Gross loans
1,066,522
1,285,672
1,389,109
1,529,614
1,681,936
Less provisions
64,613
53,099
53,353
57,892
64,000
Net loans
1,131,135
1,338,770
1,442,462
1,587,505
1,745,936
Long-term investments
8,422
7,246
1,306
1,805
2,380
Fixed assets
56,541
57,978
59,365
60,540
61,502
Goodwill
0
0
0
0
0
Other intangible assets
0
0
0
0
0
Other non IEAs
106,763
120,998
120,998
120,998
120,998
Total assets
1,992,545
2,174,219
2,433,942
2,709,501
3,017,377
Customer deposits
1,490,845
1,577,730
1,774,946
1,996,814
2,246,416
Bank deposits, CDs, debentures
85,881
102,629
127,525
132,829
138,764
Other int bearing liabilities
63,473
102,590
96,411
97,161
97,911
Total int bearing liabilities
1,640,199
1,782,949
1,998,882
2,226,803
2,483,090
Non-int bearing liabilities
100,100
100,100
112,164
125,736
141,004
Total liabilities
1,740,299
1,883,049
2,111,046
2,352,539
2,624,094
Minority interest
22,567
26,642
31,634
36,626
41,618
Common stock
29,310
29,310
29,310
29,310
29,310
Preferred stock
Retained earnings
166,995
197,304
224,038
253,111
284,441
Reserves for credit losses
0
0
0
0
0
Proposed dividends
0
0
0
0
0
Other equity
33,374
37,915
37,915
37,915
37,915
Shareholders' equity
229,679
264,528
291,263
320,336
351,665
Total liabilities and equity
1,992,545
2,174,219
2,433,942
2,709,501
3,017,377
Non-perf assets
22,677
16,134
17,449
19,194
21,113
Balance sheet ratios (%)
Loans to deposits
71.5
81.5
78.3
76.6
74.9
Equity to assets
11.5
12.2
12.0
11.8
11.7
Asset quality & capital
NPAs/gross loans (%)
2.1
1.3
1.3
1.3
1.3
Bad debt charge/gross loans (%)
1.51
0.87
0.82
1.03
1.03
Loss reserves/assets (%)
-3.24
-2.44
-2.19
-2.14
-2.12
Loss reserves/NPAs (%)
-284.9
-329.1
-305.8
-301.6
-303.1
Tier 1 capital ratio (%)
0.0
0.0
0.0
0.0
0.0
Total capital ratio (%)
19.1
21.2
21.4
20.5
19.8
Per share
Reported EPS (IDR)
441.11
589.93
640.40
695.74
753.11
Norm EPS (IDR)
441.11
589.93
640.40
695.74
753.11
FD norm EPS (IDR)
441.11
589.93
640.40
695.74
753.11
DPS (IDR)
180.18
264.67
353.96
384.24
417.44
PPOP PS (IDR)
774.26
919.23
989.27
1,104.34
1,192.89
BVPS (IDR)
2,460.84
2,834.23
3,120.67
3,432.17
3,767.84
ABVPS (IDR)
2,460.84
2,834.23
3,120.67
3,432.17
3,767.84
NTAPS (IDR)
2,460.84
2,834.23
3,120.67
3,432.17
3,767.84
Valuations and ratios
Reported P/E (x)
16.0
12.0
11.0
10.1
9.4
Normalised P/E (x)
16.0
12.0
11.0
10.1
9.4
FD normalised P/E (x)
16.0
12.0
11.0
10.1
9.4
Dividend yield (%)
2.6
3.8
5.0
5.5
5.9
Price/book (x)
2.9
2.5
2.3
2.1
1.9
Price/adjusted book (x)
2.9
2.5
2.3
2.1
1.9
Net interest margin (%)
5.35
5.15
5.00
4.89
4.68
Yield on assets (%)
7.50
7.68
7.21
7.02
6.89
Cost of int bearing liab (%)
2.39
2.82
2.48
2.40
2.52
Net interest spread (%)
5.11
4.86
4.73
4.62
4.38
Non-interest income (%)
28.0
29.3
28.0
27.2
26.9
Cost to income (%)
42.4
38.1
37.3
35.8
35.1
Effective tax rate (%)
20.3
19.6
20.0
20.0
20.0
Dividend payout (%)
40.8
44.9
55.3
55.2
55.4
ROE (%)
19.0
22.3
21.5
21.2
20.9
ROA (%)
2.21
2.64
2.59
2.52
2.45
Operating ROE (%)
25.9
30.2
29.1
28.6
28.0
Operating ROA (%)
3.02
3.58
3.51
3.40
3.28
Source: Company data, Verdhana estimates
Company profilePT Bank Mandiri (Persero) Tbk or Bank Mandiri, headquartered in Jakarta, is the largest bank in Indonesia in terms of assets, loans and deposits.
Valuation MethodologyWe derive our TP of IDR8,700 using DuPont methodology, with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 1.03x, and a CAR-adjusted ROAE of 20.0%. We have also used 2025F book as reference. Our TP implies 2.5x FY25F P/B and 12.6x FY25F P/E. The benchmark for this stock is the JCI.
Risks that may impede the achievement of the target priceKey downside risks are: i) worse-than-expected macroeconomic trends, ii) government intervention, iii) tight liquidity competition, and iv) higher credit cost and/or OPEX growth.
ESGBank Mandiri is at the forefront of sustainable banking and has taken steps to demonstrate its commitment to be the pioneer of sustainable banking. It has launched the Sustainable Finance Action Plan or Rencana Aksi Keuangan Berkelanjutan (“RAKB”), focusing on responsible lending, which serves as a basis for Green, Social and/or Sustainability (“GSS”) Bond issuance(s). RAKB was designed to increase the size of sustainability financing portfolio of the Bank by implementing it gradually in the wholesale and retail segment based on the Bank’s priority. Bank Mandiri has committed to the United Nations Sustainable Development Goals (“SDGs”) by making RAKB the foundation of investment decision making. There are three essential pillars in RAKB, which include: Sustainable Banking Focused on banking activities, the goal of this pillar is to manage the environment, social, and governance (“ESG”) risk and to expand the opportunities to become a sustainable bank. Sustainable Operation Bank Mandiri is committed to improving its environment and social performance by redesigning real estate management, digital transformation, and human capital management. Corporate Social Responsibility (”CSR”) Bank Mandiri is implementing an integrated and holistic philosophy, which acts as a foundation in corporate social responsibility activities.

Fig. 1: BMRI LAR/NPL formation (%)

Source: Company data, Verdhana research

 

Fig. 2: BMRI LAR/NPL coverages (%)

Source: Company data, Verdhana research

 

Fig. 3: BMRI earnings changes

Source: Company data, Verdhana estimates

 

Fig. 4: BMRI valuation

 Bank Mandiri - Fair valuation NewRemarks
 Risk free rate %           6.5 
 Equity risk premium %           7.8 
 Beta x         1.03 
 Cost of capital %         14.5 
 Growth rate (2-yr Cagr) %         11.0 
 CAR-adj ROAE %         20.0Up from 19.75%
 12mth fwd book        3,432 
 Target PB multiple           2.52025F book as reference 
 Implied PER          12.62025F earnings as reference 
 Implied TP (IDR)      8,741Rounded to IDR8,700 (up from previous TP IDR8,450)
Source: Company data, Verdhana estimates

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.


This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.


RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Rating Table

Rating
Remains
Buy
Target price
Increased from IDR 8,450
IDR 8,700
Closing price
25 October 2024
IDR 7,050
Implied upside+23.4%
Market Cap (USD mn)41,664.2
ADT (USD mn)40.8

Stock Chart Data


Source: LSEG, Nomura

M cap (USDmn)
41,664.2
Free float (%)
40.0
3-mth ADT (USDmn)
40.8
(%)
1M
3M
12M
Absolute (IDR)
-2.1
7.2
20.5
Absolute (USD)
-5.5
11.4
22.3
Rel to Jakarta Stock Exchange Composite Index
-1.8
0.6
7.6


Research Analysts

Nicholas Santoso (nicholas.santoso@verdhana.id)

Erwin Wijaya (erwin.wijaya@verdhana.id)

Tags: Banks, BMRI, BMRI JK, BMRI IJ, Nicholas Santoso, Erwin Wijaya
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