Bank Danamon: Loan Restructuring In The Spotlight

Summary

  • Bank Danamon reported a net loss in 2Q 2020, and the outlook for 2H 2020 is uncertain with higher credit cost and loss on restructuring being key downside risks.
  • Looking ahead, Bank Danamon does expect further loan restructuring in 2H 2020, but it thinks that the worst could be over.
  • Bank Danamon trades at 0.63 times trailing P/B and 9.1 times consensus forward FY 2021 P/E, and it offers a consensus forward FY 2021 dividend yield of 3.5%.
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Elevator Pitch

I maintain a Bullish rating on Indonesia-listed PT Bank Danamon Indonesia Tbk (OTC:PBDBY) (OTC:PBDIF) [BDMN:IJ], a 94.1%-owned subsidiary of Japan's Mitsubishi UFJ Financial Group (MUFG) or MUFG.

This is an update of my prior article on Bank Danamon published on March 2, 2020. Bank Danamon's share price has declined by -12% from IDR3,170 as of February 28, 2020 to IDR 2,770 as of August 19, 2020, since my last update. Bank Danamon trades at 0.63 times trailing P/B and 9.1 times consensus forward FY 2021 P/E, and it offers a consensus forward FY 2021 dividend yield of 3.5%.

Bank Danamon reported a net loss of -IDR400 billion in 2Q 2020, and the outlook for 2H 2020 is uncertain with higher credit cost and loss on restructuring being key downside risks. Bank Danamon would have been profitable in 2Q 2020 if the loss on restructuring of -IDR402 billion was excluded, and this brings the company's loan restructuring into the spotlight.

Looking ahead, Bank Danamon does expect further loan restructuring in 2H 2020, but it thinks that the worst could be over. More importantly, Bank Danamon's 0.63 times P/B multiple has priced in most of the negatives, which justifies a Bullish rating on the stock.

Readers have the option of trading in Bank Danamon shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers PBDBY and PBDIF, or on the Indonesia Stock Exchange with the ticker BDMN:IJ. For those shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.

For those shares listed in Indonesia, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Indonesia Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $400,000, and market capitalization is above $1.8 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors who own Bank Danamon shares listed in Indonesia include Dimensional Fund Advisors, Norges Bank Investment Management, Ashmore Group, and The Vanguard Group, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity, or international brokers with Asian coverage like Hong Kong's Monex Boom Securities and Singapore's OCBC Securities.

A Net Loss For 2Q 2020

Bank Danamon announced the company's 2Q 2020 financial results on July 30, 2020, and it reported a net loss of -IDR400 billion in the most recent quarter as compared to a net profit of IDR1,245 billion for 1Q 2020. The bank suffered a loss in 2Q 2020, largely due to lower non-interest income and higher cost of credit.

Bank Danamon's non-interest income fell by -53% QoQ from IDR1,332 billion in 1Q 2020 to IDR631 billion in 2Q 2020. Credit-related fee income declined because loan disbursement decreased in line with weaker demand in 2Q 2020, especially in the SME and automotive financing segments. Non-credit related fee income dropped in the second quarter of the year, as lock-down measures in Indonesia led to Bank Danamon temporarily shutting down approximately 30% of the company's branches in April.

Separately, the bank's credit cost grew +80% QoQ from IDR1,148 billion in 1Q 2020 to IDR2,063 billion in 2Q 2020. Bank Danamon's cost of credit as a percentage of total average loans increased from 3.3% to 4.5% over the same period.

On the positive side of things, Bank Danamon's net interest margin was relatively stable, and its enterprise segment still delivered positive loan growth.

The bank's net interest margin declined marginally by -0.5 percentage points QoQ from 8.4% in 1Q 2020 to 7.9% in 2Q 2020, but its net interest margin was flat YoY at 8.2% for 1H 2020. This was largely attributable to an increase in Bank Danamon's CASA (Current Account Savings Account) ratio from 46.4% as of end-1H 2019 and 49.9% as of end-1Q 2020 to 53.2% as of end-2Q 2020.

Bank Danamon delivered a negative loan growth of -3% QoQ in 2Q 2020, but the bank's enterprise banking business was the only one segment which delivered a positive +4% QoQ and +16% YoY growth in the recent quarter. Japan's MUFG became Bank Danamon's single largest shareholder with a 94.1% equity interest in May 2019, and synergies between MUFG and Bank Danamon were the key growth driver for the bank's enterprise segment.

Bank Danamon's loans due to synergies with MUFG, which the company refers to as "synergy loans," grew by +283% from IDR1,050 billion as of end-2018 to IDR4,017 billion as of end-1H 2020. Notably, Bank Danamon emphasized in the company's 2Q 2020 results presentation slides that it "is still in the early stage of realizing synergy potentials with MUFG network and their ecosystems," which implies further growth in "synergy loans."

All Eyes On Loan Restructuring

Bank Danamon recognized a loss on restructuring of -IDR402 billion in 2Q 2020; in other words, the company would have been profitable in the recent quarter if the loss on restructuring was excluded. This brings Bank Danamon's loan restructuring into the spotlight. Loan restructuring takes various forms, including but not limited to, deferring principal payments, interest rate reductions, and deferring interest payments.

Bank Danamon's restructured loans amounted to IDR28,316 billion as of June 30, 2020, or 19% of the company's total loans, of which IDR17,112 billion is attributable to its multi-finance business, PT. Adira Dinamika Multi Finance Tbk. It is notable that most of PT. Adira Dinamika Multi Finance Tbk's debtors did not ask for a further extension after the expiry of the three-month grace period (deferral of both principal payments and interest payments).

Looking ahead, Bank Danamon does expect further loan restructuring in 2H 2020, but the worst could already be over. The bank noted at its recent 2Q 2020 earnings call on July 30, 2020 that "I think the peak (for loan restructuring) was in May" and "by June we were already sloping down."

Uncertainty Over 2H 2020 Outlook

Market consensus expects Bank Danamon's net income to fall by -42% YoY from IDR3,701 billion in FY 2019 to IDR2,153 billion in FY 2020. Considering that Bank Danamon's net profit dropped by a larger -53% YoY from IDR1,813 billion in 1H 2019 to IDR845 billion in 1H 2020, there are expectations of an HoH (Half-on-Half) recovery for the bank in 2H 2020.

Management is not as certain about the prospects of the company in the second half of the year. Bank Danamon guided at the company's recent 2Q 2020 earnings call that it expects positive YoY growth for the company's operating income and pre-provision operating profit in 2H 2020. But the company cautioned that net profit growth for 2H 2020 is dependent on "how soon the economic recovery will come up and how likely that restructured customers will start the repayment" and there is "still lots of uncertainty about cost of credit and the loss on restructuring."

Non-interest income, especially non-credit related fee income, should rebound strongly in 2H 2020, as Bank Danamon noted at its 2Q 2020 earnings call on July 30, 2020 that approximately 98% of its bank branches have already re-opened. With respect to net interest income, Bank Danamon has guided for loan growth for the enterprise segment to be in the +10%-15% range for 2H 2020, as it continues to realize synergies with MUFG.

On the flip side, sell-side analysts see Bank Danamon's net interest margin declining from 8.32% in FY 2019 to 8.17% in FY 2020, prior to recovering to 8.44% in FY 2021. More importantly, cost of credit and loss on restructuring could potentially surprise on the downside in 2H 2020, as per management's comments at the recent results briefing highlighted above.

Valuation and Dividends

Bank Danamon trades at 0.63 times P/B based on its share price of IDR 2,770 as of August 19, 2020. As a comparison, the bank's three-year and five-year mean P/B multiples were 1.33 times and 1.22 times, respectively.

The stock is also valued by the market at consensus forward FY 2020 and FY 2021 P/E multiples of 12.3 times and 9.1 times, respectively. In contrast, Bank Danamon's three-year and five-year consensus forward next twelve months' P/E multiples were 12.9 times and 12.4 times, respectively.

Market consensus expects Bank Danamon's ROE to decline from 10.3% in FY 2019 to 4.7% in FY 2020 and 6.9% in FY 2021.

Bank Danamon offers consensus forward FY 2020 and FY 2021 dividend yields of 4.9% and 3.5%, respectively.

Risk Factors

The key risk factors for Bank Danamon are higher-than-expected cost of credit and loss on restructuring, and a larger-than-expected cut in dividends for FY 2020 and beyond.

Note that readers who choose to trade in Bank Danamon shares listed as ADRs on the OTCBB (rather than shares listed in Indonesia) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Asia Value & Moat Stocks is a research service for value investors searching for attractive Asia-listed investment opportunities  with a huge gap between price and intrinsic value, leaning towards both deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high quality businesses, hidden champions and wide moat compounders).


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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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