Expecting better-than-expected FY18F results. Bank Mandiri (BMRI IJ) is indicated to book FY18F net profit of around IDR25tn, beating FY18F our and consensus estimations of IDR23.3tn and IDR24.1tn, respectively. The bank is scheduled to announce the results on January 28, 2018.
Major difference from lower credit cost… We believe the major difference with our estimation come from the bank’s lower credit cost than we projected. Based on 11M18 unconsolidated results, BMRI’s credit cost was just 1.8% compared to our assumption of 2.2% and its initial target of between 2.0% and 2.2%. This lower-than-expected credit cost may be attributed to improving loan quality over the period as shown by gradual decrease in NPL ratio (Sep 2018: 3.0% vs. Jun 2018: 3.1% and Dec 2017: 3.5%), in addition to adequate loan loss coverage of 137% at end September 2018.
…and higher-than-expected non-interest income. Soaring noninterest income, which jumped 51.1% YoY in 11M18, may also contribute to the higher-than-expected FY18F net profit. Gain from treasury transactions and one-time booking of tax refund may be the major drivers for the substantial growth in the non-interest income.
In-line lending expansion. BMRI’s total lending growth until the end of November 2018 was at 13.9% YoY and 6.3% YTD, relatively in-line with our assumption of 12% YoY and the bank’s target of 11%-13% YoY. However, the impact from this modest expansion may be reduced by margin contraction as net interest income grew by only 2.7% YoY in 11M18. The contraction was believed to be partly attributed to lower average lending yield amid the change in lending mix toward loweryielding corporate loans, in addition to rising funding cost in line with market rate increase..
Valuation. We keep our BUY recommendation on BMRI supported by the bank’s improving fundamentals and strong banking franchise to overcome the macro challenges. However, due to the share price rally in the past weeks, we recommend waiting for better entry price to accumulate the counter again.
