Initiation of Coverage

COMPANY RESEARCH REPORT UPDATE

BANK DANAMON: Negatively Affected By Rising Interest Rates Recommendation: SELL

Ticker Code: BDMN
Current Price: IDR 6,050
Bank Indonesia’s decision to raise interest rates by 25bp in the first week of
Target Price: IDR 5,900
February is a reversal trend in Indonesia interest rates. We believe PT. Bank Report Date: 2/7/2011
Danamon Indonesia (BDMN) finds it hard to overcome the rise in interest
Sector Classification
rate due to high LDR, low CASA percentage of total deposits, and a
IDX Classification: Finance
decreasing Capital Adequacy Ratio. We initiated our coverage of Bank IDX Sub-Sector: Bank
Danamon with a Sell Recommendation and the counter is likely to
underperform the sector. Our target price of Rp 5,900 is implied by the 2.6x Company Profile
Price IDR 6,050
P/BV. Date of Price 2/7/2011
Market Cap: IDR 49.92 tn / USD 5.52 bn
Investment Rationale Free Float: 32.35%
Avg Daily Trading to Free Float: 0.27%
Bank Danamon's high LDR make it prone to rise in interest rates. 52 week high (IDR.) 7,100
52 week low (IDR.) 4,275
BDMN’s Q3 2010 LDR reached 111%, higher than BBNI, BMRI, and BNLI; Number of total shares (bn) 8.22
respectively 69%, 72%, and 84%. The Indonesian Central Bank has put a Fiscal Year End 12/31/2010
LDR range of 78%-100%. Price Target IDR 5,900
End Date 2/7/2012

BDMN has a low CASA in 3Q 2010. Danamon’s 40% CASA is lower than Company Address
seven other banks. Low CASA is a disadvantageous since interest rate is Menara Bank Danamon
going up. Even though BDMN plans to increase the number of branches Jl Prof Dr. Satrio kav E4 no. 6 Mega Kuningan
Jakarta, Indonesia
from 1,896 to 1,915 and the number of ATMs from 846 to 880, we believe
that BDMN’s weak franchise value will make it difficult to fund its aggressive Stock Performance among other banks
growth without sacrificing the net interest margin.
400

BDMN has suffered due to a decrease in CAR from 17.7% in 2009 to 350

13.7% as of 3Q10. A sharp decrease in CAR due to accounting treatment of 300

operational income mandated by the Indonesian Central Bank and of 250
investment in subsidiaries (capital charged). Even though BDMN’s CAR is 200
still relatively high compared to the regulatory requirement of 8%, we believe
150
a rapid growth in its finance subsidiaries might erode its CAR quickly.
100

Possibility of DBS acquisition is still a remote possibility since 50

Indonesian Central Bank’s high valuation might hinder the potential 0

acquisition of Bank Danamon. 4-Jan-10 4-Apr-10 4-Jul-10 4-Oct-10 4-Jan-11
JCI BDMN BNGA BNLI

(in IDR. bn)

Summary 2007 2008 2009 2010E 2011E 2012E
Net Interest Income 7,135.8 8,355.8 9,465.2 10,945.6 10,538.7 10,801.4
Other Operating Income 2,540.0 2,819.7 3,170.8 3,772.0 4,487.2 5,159.8
Net Income 2,116.9 1,530.0 1,532.5 2,618.1 2,705.0 2,977.3
Net Income margin 21.9% 13.7% 12.1% 17.8% 18.0% 18.7%
EPS (IDR) 317.9 229.2 186.4 318.4 328.9 362.0
EPS growth (yoy %) -27.9% -18.7% 70.8% 3.3% 10.1%
P/E (x) 25.2 13.7 24.8 18.7 17.9 16.3
ROE (%) 20.9% 14.3% 11.6% 15.9% 15.2% 15.5%
ROA (%) 2.5% 1.6% 1.5% 2.5% 2.4% 2.5%
Net Interest Margin 9.4% 9.8% 10.8% 11.7% 9.9% 9.4%
P/BV (x) 3.7 3.8 3.1 2.9 2.6 2.4
CAR (%) 20.6% 14.0% 17.7% 13.5% 13.4% 13.3%
LDR (%) 92.3% 90.4% 94.1% 103.0% 101.0% 101.0%
DPS (IDR) 158.9 114.6 93.0 159.2 164.5 181.0
Loan growth 25.4% -5.4% 25.4% 0.3% 3.7%
Deposit growth 28.0% -9.1% 14.6% 2.3% 3.7%
High LDR make it prone to rise in interest rates

BDMN is the second highest LDR compared to other nine banks in Q3 2010 following BBTN’s 123%. Three big banks in
terms of assets (BCA, Bank Mandiri, and BNI) have the smallest LDR compare to others. Those banks are also having
lower than Bank Indonesia’s mandate of 78% minimum LDR. Historically, Danamon’s LDR had increased from 92% in 2007
to 94% in 2009. We believe Danamon’s LDR will stay around 100% in the next year.

Loan to Deposit Ratio Q3 2010

140%
123.1%
120% 111.6%
95.7% 100%
100% 90.2% 87.4% 84.4%
79.7%
80% 72.2% 68.9% 78%

60% 54.0%

40%

20%

0%
BBTN BDMN BNII BNGA BBRI BNLI PNBN BMRI BBNI BBCA

Danamon’s business models are consumer financing and micro financing. Danamon has Adira Finance to serve as
consumer financing company while Danamon Simpan Pinjam deals with micro financing. In raising interest rate, consumer
loan will be hit the most compared to other loans. Danamon’s interest margin will be squeezed whenever interest is up.High
LDR make it prone to rise in interest rate.

Weak franchise value due to its low CASA

Danamon has a weak franchise value due to its low CASA as % of total deposits. CASA as a percentage of total deposits is
the ratio between current account and saving account against total deposits. High CASA as percentage of total deposits
means bank can manage to seek cheap funding. Bank Central Asia is the best bank in terms of CASA in Q3 2010. BCA has
75% CASA. It means that 75% of the total deposits are from cheap resources. In rising interest rate, bank which has higher
CASA will have advantage due to cheap funding. Danamon has a low CASA in 3Q 2010. In fact, Danamon is the third
lowest CASA compare to other 10 banks. Danamon only higher than Bank International Indonesia (BNII) and BTN.
Danamon’s low CASA is a weakness factor.

CASA as % of Total Deposits Q3 2010

80% 75%

70%
57% 57% 57%
60%
49%
50% 45% 45%
40% 39%
40% 33%
30%
20%
10%
0%
BBCA BBRI BMRI BBNI PNBN BNGA BNLI BDMN BNII BBTN
CAR dropped quite significantly

Danamon CAR dropped notably due to accounting treatment of operating risk and Investment in subsidiaries. Danamon has
suffered due to decline in CAR from 17.7% in 2009 to 13.7% as of 3Q10. Decrease in Capital Adequacy Ratio due to higher
operational risk and investment in subsidiaries (capital charged) may hinder Danamon to grow fast. Bank Indonesia’s
current calculation in operational risk is 15% times operational income. Danamon has a large operational risk due to big
amount of operational income, especially from Adira Finance and Danamon Simpan Pinjam. Another factor that may hinder
BDMN from growing fast is investment in subsidiary (capital charge calculation). Bank Indonesia pinpoint that Danamon’s
investment in subsidiary (for this matter: Adira Finance) should be calculated, resulted in higher capital charge.

Remote possibility of acquisition

Possibility of DBS acquisition is still a remote possibility. DBS has already denied the issue. It is believed that DBS will think
twice in acquiring banks in Indonesia. Banking industry has been overpriced. Danamon has 2.8x P/BV while DBS has 1.3x
P/BV. We believe acquisition is still remote possibility.

Valuation: Rp. 5,900 per share target price based on 2.6x P/BV of 2011E

Danamon target price is based on 2.6x P/BV of 2011E results. Currently, Danamon is trading at Rp.6,050 per share, which
implies trading multiples of 2.8x P/BV. Our target price in the next 12 months is Rp. 5,900 per share based on 2.6x P/BV of
2011E results. We believe that our multiples valuation is not demanding considering that BMRI, BBNI are traded current
P/BV of 3.2x and 2.4x respectively.

P/BV vs ROE at 01 Feb 2011

P/BV
5.00
4.50
BBCA
4.00
BNGA BBRI
3.50
BDMN BMRI
3.00
BBNI
2.50
BNLI
2.00
PNBN
1.50
1.00
0.50
-
0.0% 10.0% 20.0% 30.0% 40.0%
ROE

Earnings Outlook: Danamon will have a decline in net income growth

Danamon share price is underperformed compare to JCI. Since January 2010 until the end of January 2011 Danamon
share price has increased 28.6% while BNLI raised 88.2% and Jakarta Composite Index (JCI) increased 32.4%. So,
compare to BNLI and JCI, Danamon’s share price is underperformed.

We expect Danamon will have a decline in net income growth. We believe net income growth will decline from 70% in
2010E to 3.3% in 2011E. Based on our analysis, we expect Danamon will book a decrease in net interest income of Rp.10.9
trillion in 2010E to Rp.10.5 trillion in 2011E. Another important factor we believe will support the projected decrease in net
income growth is decline in interest earning assets growth of 18% in 2010E to 3.1% in 2011E. Loan growth is also projected
to decline by 25.4% in 2010E to 0.3% in 2011E. We also expect a decrease in net interest margin of 11.7% in 2010E to
9.9% in 2011E.

Danamon is expected to decline in Return on Equity (ROE). We believe Danamon will decrease in ROE of 15.9% in
2010E to 15.2% in 2011E. This trend is supported by decline in ROA of 2.5% in 2010E to 2.4% in 2011E. The net interest
spread is also decrease from 10.5% in 2010E to 8.6% in 2011E.
Income statement 2007 2008 2009 2010E 2011E 2012E Dupont 2007 2008 2009 2010E 2011E 2012E
Net interest income 7,135.8 8,355.8 9,465.2 10,945.6 10,538.7 10,801.4 ROE (%) 20.9% 14.3% 11.6% 15.9% 15.2% 15.5%
Other operating income 2,540.0 2,819.7 3,170.8 3,772.0 4,487.2 5,159.8 ROA (%) 2.5% 1.6% 1.5% 2.5% 2.4% 2.5%
Gross revenue 9,675.8 11,175.5 12,636.0 14,717.6 15,025.9 15,961.2 Net Interest Margin 9.4% 9.8% 10.8% 11.7% 9.9% 9.4%
Non-Interest Operating exp (5,308.1) (6,899.8) (6,963.7) (7,853.7) (8,016.1) (8,508.6) Net Interest Spread 8.4% 8.8% 9.6% 10.5% 8.6% 8.1%
Net Non Operating Expenses (47.4) 236.7 (411.6) (479.3) (489.4) (519.9)
Pre-provision operating profit 4,320.3 4,512.4 5,260.8 6,384.5 6,520.5 6,932.7
Provision for Credit Losses (1,006.8) (1,834.6) (2,890.3) (2,538.5) (2,546.8) (2,559.1) Per share data 2007 2008 2009 2010E 2011E 2012E
Income before tax 3,313.5 2,677.8 2,370.6 3,846.0 3,973.7 4,373.7 EPS (IDR) 317.9 229.2 186.4 318.4 328.9 362.0
Net income 2,116.9 1,530.0 1,532.5 2,618.1 2,705.0 2,977.3 Book value per share (IDR) 1,626.8 1,584.5 1,922.0 2,081.2 2,245.7 2,426.7
Dividend paid 1,058.5 765.0 764.5 1,309.1 1,352.5 1,488.7 Dividen per share (IDR) 158.9 114.6 93.0 159.2 164.5 181.0
Retained earnings 6,574.9 6,272.0 7,537.5 8,846.5 10,199.0 11,687.7 PER (x) 25.2 13.7 24.8 18.7 17.9 16.3
PBV (x) 3.7 3.8 3.1 2.9 2.6 2.4
Balance sheet 2007 2008 2009 2010E 2011E 2012E
Asset Capital adequacy ratio 2007 2008 2009 2010E 2011E 2012E
Cash 5,213.6 6,981.9 5,937.5 7,139.5 7,162.8 7,429.5 Risk weighted asset 59,780.2 67,853.7 62,941.0 89,625.5 90,643.8 92,306.4
Placement - BI and interbanks 5,597.0 7,095.1 6,096.9 7,456.8 7,481.2 7,759.7 Total capital 12,296.0 9,491.9 11,151.9 12,115.9 12,167.6 12,316.0
Marketable securities 14,961.4 14,230.9 12,796.0 10,941.8 14,863.0 16,409.1 CAR 20.6% 14.0% 17.7% 13.5% 13.4% 13.3%
Gross Loans 53,329.6 66,897.5 63,277.6 79,328.0 79,587.0 82,550.2 Assets/Equity 8.25 10.14 6.24 6.55 6.25 6.03
Allowance for Loan Loss (1,522.0) (1,610.4) (2,255.4) (3,213.3) (4,323.3) (5,645.6)
Nett Loans 51,807.5 65,287.2 61,022.2 76,114.7 75,263.7 76,904.7 Asset quality 2007 2008 2009 2010E 2011E 2012E
Total interest earning asset 77,579.5 93,595.1 85,852.7 101,652.9 104,770.7 108,503.0 Net charge-off ratio 1.8% 1.0% 2.1% 2.0% 1.7% 1.4%
Fixed Assets (Nett) 1,538.9 1,905.0 1,802.3 1,699.5 1,596.8 1,494.0 NCO/reserves 60.0% 39.1% 61.0% 45.3% 31.4% 20.5%
Other asset 10,291.4 11,768.2 10,943.0 8,830.5 9,015.6 10,374.8 Reserves/total loans 2.8% 2.4% 3.5% 4.1% 5.4% 6.8%
Total asset 89,409.8 107,268.4 98,598.0 112,183.0 115,383.0 120,371.8 NCO/last year's provision 83.6% 62.9% 184.1% 70.4% 53.4% 45.4%
Provision/average gross loan 2.0% 1.2% 3.2% 3.6% 3.2% 3.2%
Liabilities
Deposits From Customer 57,803.9 73,969.1 67,216.2 77,017.5 78,799.0 81,732.9 Management quality 2007 2008 2009 2010E 2011E 2012E
ST borrowings 9,515.0 11,010.1 5,678.3 8,408.8 8,436.2 8,750.3 NII/Revenue 73.7% 74.8% 74.9% 74.4% 70.1% 67.7%
LT Debt 6,032.3 3,922.0 4,458.3 3,551.0 3,551.0 3,551.0 Non interest income/revenue 26.3% 25.2% 25.1% 25.6% 29.9% 32.3%
Efficiency Ratio (Non-Interest
Total interest bearing liabilities 73,351.2 88,901.2 77,352.8 88,977.3 90,786.2 94,034.2 Exp/Revenue) 54.9% 61.7% 55.1% 53.4% 53.3% 53.3%
Other liabilities 4,888.1 7,257.9 5,343.1 5,994.6 6,033.3 6,285.4 Pre-tax income margin 34.2% 24.0% 18.8% 26.1% 26.4% 27.4%
Total liabilities 78,239.3 96,159.1 82,696.0 94,971.9 96,819.5 100,319.6 Net income margin 21.9% 13.7% 12.1% 17.8% 18.0% 18.7%

Minority interest 337.0 530.2 96.2 96.2 96.2 96.2 Revenue/no. of employees (IDR bn) 0.27 0.27 0.30 0.35 0.35 0.37

Shareholders equity Earnings quality 2007 2008 2009 2010E 2011E 2012E

Capital 4,258.5 4,307.1 8,268.3 8,268.3 8,268.3 8,268.3 Gross revenue by average assets 11.4% 12.3% 14.0% 13.2% 13.5%
Non-interest income by average
Retained earnings - net 6,574.9 6,272.0 7,537.5 8,846.5 10,199.0 11,687.7 assets 2.9% 3.1% 3.6% 3.9% 4.4%
Total shareholders equity 10,833.4 10,579.1 15,805.8 17,114.8 18,467.3 19,956.0 Net interest spread 8.8% 9.6% 10.5% 8.6% 8.1%
Total liabilities and equity 89,409.8 107,268.4 98,598.0 112,183.0 115,383.0 120,371.8 Net interest margin 9.8% 10.8% 11.7% 9.9% 9.4%

Liquidity 2007 2008 2009 2010E 2011E 2012E

Growth 2007 2008 2009 2010E 2011E 2012E Loans to deposits (LDR) 92.3% 90.4% 94.1% 103.0% 101.0% 101.0%
Loan (Gross) growth 25.4% -5.4% 25.4% 0.3% 3.7% Deposits to Loans 108.4% 110.6% 106.2% 97.1% 99.0% 99.0%

Total interest earning asset growth 20.6% -8.3% 18.4% 3.1% 3.6% Total Loans/Total Assets 59.6% 62.4% 64.2% 70.7% 69.0% 68.6%
Total asset growth 20.0% -8.1% 13.8% 2.9% 4.3%
Deposit growth 28.0% -9.1% 14.6% 2.3% 3.7%
Total interest bearing liabilities growth 21.2% -13.0% 15.0% 2.0% 3.6% Other information 2007 2008 2009 2010E 2011E 2012E
Total liabilities growth 22.9% -14.0% 14.8% 1.9% 3.6% Number of shares (bn) 6.7 6.7 8.2 8.2 8.2 8.2

Net interest income growth 17.1% 13.3% 15.6% -3.7% 2.5% Number of employees (person) 35,342 41,617 41,615 42,031 42,451 42,876
Other operating income growth 11.0% 12.5% 19.0% 19.0% 15.0% Number of branches 1,426 1,871 1,896 1,915 1,934 1,953
Gross revenue growth 15.5% 13.1% 16.5% 2.1% 6.2% Number of ATM 690 814 846 880 915 952
Other operating expense growth 30.0% 0.9% 12.8% 2.1% 6.1%
Net income growth -27.7% 0.2% 70.8% 3.3% 10.1%
EPS growth -27.9% -18.7% 70.8% 3.3% 10.1%

Research by :
Anton K
PT. Independent Research & Advisory Indonesia
Suite 4802 - Menara BCA Grand Indonesia | Jl. MH. Thamrin no. 1 | Jakarta 10310, Indonesia
Phone: (62-21) 2358 7001 | Fax: (62-21) 2358 7005 | Website: www.irai.co.id
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