Bank Mandiri's net profit up 7% to US$307m in 1Q17

Loans grew a healthy 14% yoy.

According to Maybank Kim Eng, Bank Mandiri’s (BMRI’s) 1Q17 earnings achieved only 22% of their FY17F due to management’s strategy to front-load provisions. But as CoC is expected to normalise, the bank should be on track to meet their 11.7% ROE estimate.

Here’s more from Maybank Kim Eng:

BMRI started off 2017 with a weak 1Q17 net profit of IDR4.1t (US$307m) (+7% YoY). The result was driven by two factors. First, a 50bps decline in lending yield as BMRI shifted more towards lower-yielding corporate and consumer credit to avoid taking on additional risk. Hence, despite a healthy 14% YoY loan growth, NIM slipped 30bps QoQ to 5.7%.

Second, management’s strategy to front load provisions totalling IDR5.7t (US$427m), is already 32% of our FY17F. CoC is expected to normalise for the remainder of 2017. Hence, we made no change in our FY17 provision target of IDR18t (US$1.3b).

The high provision in 1Q17 resulted in a 87bps increase in NPL coverage to 133%. NPLs stayed at 4% despite the aggressive write offs totalling IDR3.2t (US$240m) in 1Q17. This is the highest NPL among banks under our coverage. 52% of IDR3.4t (US$255m) downgrades to NPLs in 1Q17 were in the commercial segment, which was dominated by IDR500b (US$37m) in loans to a plastic bottling company.

We think BMRI’s NPL has peaked. However, we do not expect a significant improvement in loan quality as both special mention and restructured loans are still increasing QoQ. Hence, we maintain our NPL target of 3.7% which is achievable through ~IDR9t (US$675m) write-offs for FY17. Combined with a stable NIM for the rest of 2017 this should result in 11.7% ROE.