February 18, 2011

INDONESIA EQUITY Investment Research

DMG & Partners Research BANKS
Rocky Indrawan +65 6232 3832 rocky.indrawan@dmgaps.com.sg

4Q10 Results Review

BUY

Private Circulation Only

Rp6,450 Rp7,800 Rp7,800

Bank Danamon
A positive finish

Price Previous Target

Banks Bank Danamon is the sixth largest bank in Indonesia by asset size. It is the majority holder of Adira Dinamika Multi Finance, Indonesias second largest two-wheeler financier. Stock Profile/Statistics
Bloomberg Ticker Share Capital (m) Market Cap (Rpbn) 52 week HL Price (Rp) 3mth Avg Vol (000) YTD Returns Beta (x)

BDMN IJ 8,418 54,293 6,950 4,650 11,891 13.2 1.49

A decent picture although NIM squeeze was evident. Danamon closed FY10 with net earnings rising 88.2% YoY: largely in-line. Loan book posted a bumper growth of 30.6% although NIM experienced a squeeze as competition seems to have exerted downward pressure on lending rates. Progress on deposit and asset quality were encouraging. Maintain Buy with unchanged TP of Rp7,800. More moderate growth ahead. Business mix was unchanged (58% of loan in mass market) as desired with management foreseeing more moderate growth of 15-20% in mass market segment this year after pent-up demand and positive economic environment fuelled stellar growth in Adira (60% YoY) and DSP (25% YoY) in 2010. Funding franchise is clearly being addressed savings saw highest sequential growth of 12% (CASA at close to 40%) and deposit intake was heavily active in 4Q10. Asset quality showed weakness in SME & commercial segment with absolute NPL rising 51% but overall gross NPL ratio was healthy at 3.0% (4Q09: 4.6%) with NPL coverage at slightly over 100%. Takeaways from analyst briefing. Management is of the view that the current inflationary environment remains benign: it sees no crack in repayment ability of customers or demand for credit yet. NIM is expected to be under gradual pressure as non-mass market segment continues to be competitive whereas further rounds of rate hike seem imminent. Seeking to raise Rp5tn of professional funding this year and to add ~200 DSP units along with 50 new branches. Maintain Buy. The unique takeover angle and BDMNs ROAE trajectory should protect its outperformance year-to-date. We continue to like its vigorous deposit franchise progress and its mass market focus, whereas its valuation is trading at only slightly above historical averages. We retain our positive view on the stock with ~20% upside from current level, implying 2011-12f 18.3x/15.6x EPS or 3.3x/2.9x BVPS. Runaway inflation is the key risk.
FYE 31 Dec (Rpbn) Net interest income Pre-provision profit Net profit % chg y-o-y Consensus EPS (Rp) DPS (Rp) Dividend yield (%) ROE (%) ROA (%) PER (x) P/BV (x) FY09
9,608 5,696 1,533 0.2 179.1 89.5 2.4 11.62 1.49 20.7 2.41

Major Shareholders (%) Asia Financial Share Performance (%) Month 1m 3m 6m 12m Absolute 20.6 (3.0) 20.6 30.3 Relative 23.4 3.5 8.1 (2.7) 67.4

6-month Share Price Performance

FY10
10,046 6,764 2,883 88.2 342.7 91.1 1.6 16.84 2.66 16.1 2.71

FY11F
11,487 8,039 3,588 24.4 3,631 426.4 213.2 3.3 18.65 2.83 15.1 2.71

FY12F
12,349 9,049 4,219 17.6 4,393 501.4 250.7 3.9 20.01 2.98 12.9 2.45

FY13F
13,786 10,326 5,084 20.5 4,394 604.2 302.1 4.7 21.72 3.25 10.7 2.20

Sources: Company data and DMG estimates

DMG Research

DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer to important disclosures at the end of this publication. OSK Research
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BANK DANAMON 4Q10 RESULTS HIGHLIGHTS Exhibit 1: Profit & loss highlights
Growth (%) 4Q09 Interest income Interest expense Net interest income Non-interest income (NII) Operating income Operating expenses Pre-provisions profit Provisions and allowances Operating profits Non-operating income Pretax profit Tax Minorities Net profit 3,803 (1,205) 2,599 790 3,389 (1,934) 1,454 (1,015) 440 (100) 340 (154) (18) 167 3Q10 3,672 (1,092) 2,580 1,101 3,680 (1,845) 1,836 (611) 1,225 (153) 1,072 (275) (27) 770 4Q10 3,811 (1,254) 2,557 972 3,529 (1,899) 1,630 (503) 1,127 (198) 929 (223) (26) 680 QoQ 3.8 14.8 (0.9) (11.6) (4.1) 2.9 (11.2) (17.6) (8.0) 29.0 (13.3) (18.8) (3.8) (11.6) YoY 0.2 4.1 (1.6) 23.0 4.1 (1.8) 12.1 (50.4) 156.2 98.1 173.3 44.9 38.9 306.2 In-line with expectations Gross NPL continued to improve: 4Q10: 3.0% (3Q10: 3.2%; 4Q09: 4.6%). Write-back of wholesale account ~Rp31bn in 4Q10. Annualised 4Q10 cost-to-income of 53.8% Loan book grew 6.8% QoQ; 30.6% YoY. Flattish YoY interest income was largely explained by reclassification of acquisition costs. Deposit growth in 4Q10: 10.6% QoQ; 17.5% YoY. Annualised 4Q10 NIM of 10.5% - lowest since 1Q09 Remarks

Sources: Company data and DMG estimates

Exhibit 2: Profit & loss highlights

Growth (%) Interest income Interest expense Net interest income Non-interest income (NII) Operating income Operating expenses Pre-provisions profit Provisions and allowances Operating profits Non-operating income Pretax profit Tax Minorities Net profit 2009 15,683 (6,075) 9,608 1,931 11,539 (5,843) 5,696 (2,847) 2,849 (479) 2,371 (757) (81) 1,533 2010 14,418 (4,372) 10,046 3,938 13,984 (7,220) 6,764 (2,134) 4,630 (629) 4,002 (1,018) (100) 2,883 YoY (8.1) (28.0) 4.6 56.6 13.3 7.9 18.7 (25.0) 62.5 31.3 68.8 34.5 23.5 88.2 ROAA improved to 2.7%; ROAE to 16.8% Cost of credit fell to ~230bp from 330bp in 2009 (over average earning assets). Management saw no imminent stress from inflation pressure Higher personnel costs Remarks Credit growth to moderate in 2011 from a bumper 2010 number Due to lower interest rate and encouraging CASA expansion Management expects NIM to fall due to competition especially in nonmass market segment Reclassification of acquisition costs and continued asset shift to loans Rp242bn gains from sale of Govt bonds (versus Rp41bn in 2009). Gross loans/assets now at 70% versus 64% in 2009.

Sources: Company data and DMG estimates

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Exhibit 3: Underlying profitability

(%) Income yield Cost / avg assets

Exhibit 4: Pre-tax ROA

(%) Underlying profitability Provisions to assets

16 14
12

8
7 6 5 4 3

Pre-tax ROA 4.0%

10 Underlying profitability 5.8% 8

6

1 0 4Q08 2Q09 4Q09 2Q10 4Q10

4Q08 2Q09 4Q09 2Q10 4Q10

Sources : Company data and DMG estimates

Sources : Company data and DMG estimates

Exhibit 5: Interim ratios

4Q09 18.69 6.17 12.52 12.77 3.4 4.26 0.88 2.9 1.8 (1.8) (1.5) 33.1 94.1 (8.4) 7.5 7.79 57.1 23.3 4.99 4.6 14.4 78.9 3.6 15.6 17.5 1Q10 16.87 5.34 11.53 11.90 (6.6) 17.17 3.07 (2.4) 1.8 (3.9) (3.9) 35.0 99.7 1.1 (16.7) 6.58 50.0 24.8 2.43 4.1 (9.1) 90.5 3.7 15.0 16.8 2Q10 16.74 5.33 11.41 11.89 2.3 17.37 2.75 7.3 10.3 4.4 5.5 38.5 106.0 33.4 15.6 7.54 52.5 30.0 2.51 3.5 (7.4) 102.0 3.5 15.3 15.3 3Q10 16.54 5.52 11.02 11.62 3.9 17.78 2.99 5.5 8.9 4.0 4.3 39.4 112.7 3.3 (1.0) 7.18 50.1 29.9 2.75 3.2 (0.6) 109.6 3.4 13.6 13.6 4Q10 15.59 5.75 9.83 10.46 (0.9) 15.04 2.44 14.6 6.8 16.1 10.6 39.3 104.6 (11.6) 2.9 6.80 53.8 27.6 2.06 3.0 6.0 100.9 2.8 13.2 13.2

Yield on earning assets Cost of funds Interest spread Net interest margin Net interest income growth (QoQ) ROAE ROAA Interest earning assets growth (QoQ) Gross loans growth (QoQ) Interest bearing liab growth (QoQ) Customer deposit growth (QoQ) CASA mix Loan-deposit ratio Non interest income growth (QoQ) Operating expenses growth (QoQ) Cost / average assets Cost / income ratio Non int income / operating income Provision charges Gross NPL ratio Gross NPL growth (QoQ) LLP / Gross NPL LLP / Net loans Tier-1 CAR
Sources: Company data and DMG estimates

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DMG Research

DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited.

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