Bank Mandiri (BMRI IJ, BUY, TP IDR11,000) Company Update: An Arranged Marriage? - Daily Pack 7 May 2014

Good morning,

Our analysis on the reported Bank Mandiri-Bank Tabungan Negara merger suggests a neutral to mildly positive impact on the former’s ROAE and a cash call may be required to maintain capital position. While the enlarged group’s mortgage market share should rise to 34%, cost management, culture gaps and potential NPL coverage alignment, could hamper synergy extraction. A 100% controlling stake is preferred, in our view.

       Attempting a scenario analysis. We attempt to analyse the pros, cons and financial impact of a hypothetical acquisition/merger between Bank Mandiri and Bank Tabungan Negara (BBTN IJ, SELL, TP: IDR1,100). An acquisition should be a silver lining for the latter but the value proposition for the former is less obvious. We believe the deal should have a neutral or mildly positive impact to Bank Mandiri’s ROAE.

       A cash call is likely. We used several assumptions in our scenario analysis, namely: i) an acquisition of 60.1% or a 100% stake; ii) cash, recapitalisation (recap) bonds or rights issues financing options; and iii) 1.3x acquisition multiple or 1.8x trailing P/BV. A 100% cash or recap bonds-funded deal should be EPS accretive by 2.0-8.4%, lifting ROAE by an estimated 37-156bps. However, we believe a cash call is more likely, as a cash or recap bonds transaction would lower Bank Mandiri’s Tier-1 capital ratio to 10.2-11.4% (Dec 2013: 13.4%). That said, a cash-raising exercise of 10% of the current market cap should likely have minimum dilutive impact on EPS and ROAE.

       The biggest get bigger, but most metrics should weaken. On a pro-forma basis, the enlarged group’s asset should grow by ~18%, representing ~17% of industry asset. It should also become the largest mortgage lender with a 34% market share. With the exception of ROAE, which is dependent on the deal’s structure, all other key ratios of the pro-forma group should weaken, given Bank Tabungan Negara’s inferior operating metrics. Headcount should rise by 25%, a significant jump that may require some staff rationalisation or redeployment. Any realignment of Bank Tabungan Negara’s low non-performing loans (NPL) coverage ratio of 28% (relative to Bank Mandiri’s 170%) should also likely affect earnings materially. We believe a full merger should allow smoother integration of operations and extraction of synergies.  (Rocky Indrawan)

ON THE PLATTER: Indonesia Economy: Money Supply Moderated Further, Economic Activities Will Be Marginally Lower

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Best regards,

RHB OSK Indonesia Research Institute

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