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Bank Danamon

Bank Danamon (BDMN) became the first company on the Stock Exchange that has released its financial statements for the period of third quarter (Q3) of 2014/nine months of 2014. And the result? Well, since early of 2014, BDMN is one of the listed banks whose management was not able to deal with the negative impact of the increasing Bank Indonesia Rate (BI Rate), which although the bank managed to increase the revenue, but the operating profit and net profit fell significantly due to the increase in interest expense, and the trend is still going on until now. Until Q3 2014, BDMN posts net profit of Rp2.1 trillion, down 29.9% compared to the same period in 2013.

These unsatisfactory performance caused the stock to move down in the last two years, because in 2013, BDMN’ net profits were also not grew at all compared to 2012. However, this is the point: Before the year 2013, BDMN has a brilliant fundamental performance. Added with the fact that Bank Danamon is the third largest private bank in Indonesia in terms of assets after Bank BCA (BBCA), and Bank CIMB Niaga (BNGA), and coupled with a very good liquidity of the stock, then the stock of BDMN became one of the most expensive banking stocks on the Indonesia Stock Exchange with PBV between 3 to 4 times, just behind BBCA.

However, it was in the past. After dropped approximately 35% in the last two years, while the equity value of BDMN still growing to be Rp32.1 trillion at this time from Rp28.7 trillion by the end of 2012, then at the price of Rp4,000 per share, BDMN reflects PBV of 1.2 times only. Because the shares could still be considered as a blue chip, then it is an attractive valuation. BDMN is likely to rise significantly if the company managed to record positive net profit growth in its next financial statements.

And if we check the historical performance of the company, this year is the first time BDMN had its earnings decreased since 2009 (in other years, BDMN profits continued to rise). Until the third quarter of 2014, the company's ROE down to be 9.3% only, but since 2001 (yes, you read it right) to 2012, the ROE had almost always above 15% (except for 2009). From the side of the net interest margin (NIM), which still at the range between 8 – 10%, making BDMN as the bank with the second best interest margin on the Indonesia Stock Exchange after Bank BTPN (BTPN). These achievements were mainly because BDMN play in the two of most favorable credit segments, ie micro-credit, small, and medium enterprises (SMEs), and motorcycle financing through its subsidiary, Adira Dinamika Multifinance (ADMF). You see, if BDMN can only charge interest 14 – 16% per annum to corporate debtors, then for motorcycle loans, the interest could be above 40% per annum.

So, despite the company’s performance are still not attractive enough for investors to accumulate the shares, which means that the stock may not rise in the near future although the valuation was quite low, but when it was said that 'BDMN is likely to rise significantly if their next financial statements posted positive growth', then the return of such positive growth is probably only a matter of time. Some companies has a ‘not so good’ performance, or bad at all, because the company is actually bad. However, BDMN isn’t such company, even though in the two years they were going through hard times.

The question is, what caused the stagnation? Well, there is no specific cause, only because the bank lending growth, in general, was being slowed down, due to the weakening of the national economy in general, which is unfortunately has a significant impact on the performance of BDMN because the company did not do a certain expansion activities, like opening several new branches, in the last two years. BDMN, like some other banks, interested in developing fee-based income as a new source of revenue, such as credit card services (in partnership with the Manchester United football club), and pledges. But of course, the contribution of fee-based income is still very small compared to the company's overall revenue.

So what does management do to fix this? In this case, I was also somewhat confused. In its latest analyst briefing, BDMN’ management did not itemize any significant steps. They just expect that the lending will grow 15 – 17% in 2014, where the lending of ADMF expected to grow 10% only. This also explains why BDMN 'gets out' of ADMF by withdrawing dividend up to Rp2.7 trillion, or nearly half of the ADMF’ net asset (this year ADMF paid really big dividends, namely Rp2,700 per share, while the stock price at the time was only Rp9,000 per share). May be the management considered that motorcycle financing business will no longer be profitable, so instead pushing ADMF to use the existing funds to earn income, we'd better have the funds withdrawn.

While in the other profitable credit segment, namely SME, the management of BDMN are still a bit unsteady after Ali Yong, the director of lending for small and medium enterprise, resigned since March 2014 ago. Ali Yong started his career at the Bank since 1999, and has held the micro credit business (became its director) since 2008. While his successor, Muliadi Rahardja, though also has joined with the Bank since 1999, but only since this year he holds the micro credit business. So, BDMN may not able to work on specific development plans in the SME segment, because the directors still have to adjust his new post first.

In conclusion, BDMN arguably does not offer any prospect, and that's why its stock has not been feasible to buy at the moment, except: 1. In the fourth quarter of 2014, or the first quarter of 2015, BDMN’ earnings confirm to be grow again (considering the historical performance of the company, the possibility of recovery is still there), or 2. The share price fell further until the valuation is absolutely low, ie reflects PBV below 1.0 times, and that means 3,400 or below. If we look at its very good liquidity (which means that the shares are held by large fund managers), so even though the latest performance is still not convincing, BDMN may be difficult to get down to 3,400’s, unless there are certain negative sentiments or if the Jakarta Composite Index (JCI) down. But unless you can buy BDMN at price of around Rp3,400 pe share, then there are still plenty of other banking stocks on the Indonesia Stock Exchange that offer higher rise within the next few months.

PT Bank Danamon, Tbk
Rating of Performance until Third Quarter 2014: BBB
Rating of Stock Price in 4,000: BBB

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