Elevator Pitch

I maintain my “Bullish” rating on Indonesia-listed PT Bank Danamon Indonesia Tbk (OTC:PBDBY) (OTC:PBDIF) [BDMN:IJ], which is a 94.1%-owned subsidiary of Japan’s Mitsubishi UFJ Financial Group (MUFG) or MUFG. Bank Danamon currently trades at 0.69 times trailing P/B, versus its historical five-year and 10-year average P/B multiples of 1.28 times and 1.65 times respectively. This is also a new 15-year historical P/B trough for Bank Danamon. Re-rating catalysts for Bank Danamon include increased dividend payout, compliance with free float requirements, and further monetary easing. The realization of synergies with controlling shareholder MUFG is the key long-term growth driver for Bank Danamon.

This is an update of my prior article on Bank Danamon published on October 30, 2019.

Readers are advised to trade in Bank Danamon shares listed on the Indonesia Stock Exchange with the ticker BDMN:IJ, where average daily trading value for the past three months exceeds $600,000 and market capitalization is above $2 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, and Charles Schwab, or local brokers operating in their respective domestic markets.

Indonesian Stock Market Woes

Bank Danamon’s share price (excluding dividends) has dropped by -29% from IDR4,480 as of October 25, 2019 to IDR3,170 as of February 28, 2020 since my last update. Over the same period, the Indonesian benchmark Jakarta Composite Index has declined by approximately -13%. Bank Danamon has a beta of 2.13 according to Reuters, which implies that the bank’s share price has historically fallen by more than 2% for every 1% decline for the overall Indonesian stock market as a whole. In other words, broad market weakness has been a key factor in Bank Danamon’s poor share price performance in the past four months.

A Bloomberg article titled “World’s Biggest Coronavirus Victim in Equities Is Southeast Asia” published on February 28, 2020 highlighted that the MSCI Asean Index has declined by over -17% from its July 2019 peak, with both Thailand and Malaysia entering bear market territory last week. Indonesia is not that far off, having already declined -19% from its prior peak.

Dependence on China, which has been hit by the current coronavirus outbreak, is seen as the key reason for the weaknesses in Southeast Asian and Indonesian stock markets. Indonesia’s central bank has lowered its 2020 growth forecast from 5.1%-5.5% to 5.0%-5.4% two weeks ago; and Indonesia banks such as Bank Danamon, which are proxies for domestic economic growth, are inevitably impacted.

Furthermore, the operator of the Indonesia Stock Exchange disclosed to the media last week that trading in the Indonesian stock market will be suspended from a few hours to the entire trading day, if the Jakarta Composite Index fell by 5%-10% in any single trading day. The possibility of trading suspensions could potentially drive more panic selling in the market.

Bank Danamon trades at 0.69 times trailing P/B based on its share price of IDR3,170 as of February 28, 2020. In comparison, the stock’s historical five-year and 10-year average P/B multiples were 1.28 times and 1.65 times respectively. Notably, this represents a new 15-year historical P/B trough for Bank Danamon. During the 2008-2009 Global Financial Crisis, Bank Danamon only traded as low as 0.88 times P/B.

Bank Danamon is valued by the market at 7.7 times consensus forward FY2020 P/E and 6.6 times consensus forward FY2021 P/E. In contrast, the bank’s historical five-year and 10-year mean forward P/E multiples were 12.7 times and 12.6 times respectively.

Re-rating Catalysts In The Short-To-Medium Term

Putting broad market weakness aside, there could be a few re-rating catalysts for Bank Danamon in the short-to-medium term.

Firstly, there could be upside to Bank Danamon’s dividends going forward.

Bank Danamon completed the divestment of its 70% stake in insurance company, Adira Insurance, in end-November 2019. At the company’s FY2019 earnings call on February 19, 2020, Bank Danamon highlighted that “we may increase the return to our shareholder some of the capital gain (from the divestment of the equity interest in Adira Insurance)”, and that could potentially imply higher dividends for FY2020.

The bank paid out a dividend per share of IDR143.22 for FY2018, and FY2019 dividends are likely to be announced in end-March 2020. If Bank Danamon maintains its 35% dividend payout ratio in FY2019 (IDR132 in dividends per share), this would imply a dividend yield of 4.2% for the bank. Assuming Bank Danamon increases its dividend payout ratio for FY2019 to 40% (IDR151 in dividends per share) as a partial return of the divestment gain associated with Adira Insurance to shareholders, Bank Danamon’s FY2019 dividend yield rises to 4.8%.

In the medium to long term, Bank Danamon could also potentially increase its dividend payout, given its strong capital position. Bank Danamon’s CAR or Capital Adequacy Ratio was 24.2% as of end-FY2019, and its LLC or Loan Loss Coverage ratio was at a healthy 112.6%.

Market consensus expects Bank Danamon to further increase its dividends per share to IDR164 and IDR168 for FY2020 and FY2021 respectively. This implies forward FY2020 and FY2021 dividend yields of 5.2% and 5.3% respectively for Bank Danamon.

Secondly, an overhang for Bank Danamon regarding free float requirements will eventually be removed.

Japan’s MUFG became Bank Danamon’s single largest controlling shareholder in May 2019 with a 94.1% equity stake, and Bank Danamon has to increase its public free float from 5.9% currently to 7.5% by mid-2021 to comply with regulatory requirements.

The market is concerned about a potential sell-down in Bank Danamon’s shares sometime down the road, due to either MUFG offloading part of its shares or the bank doing a share placement that could potentially dilute the interests of existing shareholders.

When Bank Danamon eventually complies with the free float requirements, Bank Danamon’s trading liquidity will improve and the current overhang on the stock will be removed.

Thirdly, Bank Danamon is a beneficiary of recent monetary easing in Indonesia. A recent 50 basis points cut in minimum statutory reserves GWM is defined as the “minimum deposit of a Bank held in a demand deposit at Bank Indonesia” by the regulators. Indonesian banks’ GWM is now 5.5%, compared with 8% in the 2011-2016 period.

Also, further interest rate cuts this year to stimulate the Indonesian economy could be beneficial for Bank Danamon, especially relating to lower funding costs with respect to time deposits that typically have a tenor of between one and three months. Bank Danamon noted at the bank’s recent FY2019 earnings call on February 19, 2020 that “if we are able to cut the rate this year, any of the cut will obviously benefit us and will improve our NIMs (Net Interest Margins).” Market consensus expects Bank Danamon to improve its net interest margin from 8.3% in FY2019 to 8.5% and 8.6% in FY2020 and FY2021 respectively.

Realization Of Synergies With Controlling Shareholder Is Key Long-Term Growth Driver

Apart from broad market weakness, Bank Danamon’s lackluster loan growth is also a key reason for the bank’s poor share price performance. Loan growth, excluding micro-loans, for Bank Danamon in FY2019 was +4.8% in FY2019. In comparison, inflation was 2.72% for Indonesia in 2019.

The realization of synergies with its controlling shareholder MUFG is key to driving long-term loan growth for Bank Danamon.

Bank Danamon did not give a guidance for loan growth in FY2020, but highlighted at the recent FY2019 results briefing that synergies with MUFG are expected to account for 25%-30% of the bank’s future loan growth. Bank Danamon is targeting Japanese companies and MUFG’s non-Japanese global client which have business operations in Indonesia, with the aim of providing supply chain financing services as a start prior to cross-selling other products and services to these new clients.

Notably, Bank Danamon also added at the recent earnings call that the bank is “prudently expanding our risk appetite” with MUFG as the new controlling shareholder.

Bank Danamon’s synergies with its controlling shareholder MUFG have yet to be reflected in the company’s financial numbers. Once Bank Danamon’s loan growth picks up over time, there should be a positive re-rating of the stock’s valuation.

Risk Factors

The key risk factors for Bank Danamon include weaker-than-expected loan growth due to the negative impact of the coronavirus outbreak on the Indonesian economy, lower-than-expected dividends going forward, and a longer-than-expected time taken to realize synergies with its Japanese controlling shareholder MUFG.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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