Outlook remains bleak for Bank Danamon despite 17% profit growth in 1Q16

Declining TD rates could be a drag on further deposit raising.

Maybank Kim Eng reports that the factors driving BDMN’s 18% YoY net profit growth in 1Q16, which was in line with our estimate, indicate two important points for us. First, loan expansion is likely to remain weak for longer as bigger peers start to compete in the market that BDMN targets.

Second, declining TD rates could be a drag on further deposit raising.

Here's more from Maybank Kim Eng:

As expected, BDMN’s total credit and financing were down 3% QoQ in 1Q16 on weak demand. But further cuts in special rate TD allowed NIM to expand by nearly 40bp QoQ to 8.6%.

On a less positive note, we notice that management sacrificed coverage ratio, now down to 108% amidst the rising NPL trend, which in turn allows the bank to book IDR814b (+18% YoY) net profit in 1Q16.

Despite 1Q16 being in line, we think BDMN will face tougher challenges to future expansion coming from: 1) Intensifying competition in SME, which was initially expected to be BDMN’s growth engine, as two large SOE banks recently cut SME rates for loan size of IDR1-5b to 9.75%.

Note that BDMN’s average loan size forSME is IDR4b. 2) Potential deposit outflow towards government’s instrument as OJK cut the TD rate cap to only 100bp+BI rate. The condition is made worse by tight liquidity in the sector.