indonesia company guide bank danamon - dbs bank | singapore federal international finance (fif),...

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: MA, PY

BUY Last Traded Price ( 13 Mar 2017): Rp4,770 (JCI : 5,390.70) Price Target 12-mth: Rp5,400 (13% upside) (Prev Rp4,300) Potential Catalyst: Deliveries of transformation programme Where we differ: We are among the few bullish brokers on Danamon’s turnaround story, more visibility expected in FY17F Analyst Sue Lin LIM +65 8332 6843 [email protected] Benedictus Agung SWANDONO +6221 3003 4935 [email protected]

What’s New First full year of transformation deliveries fulfilled Ready for the second phase; growth underway Adira’s transformation to pick up speed in FY17 Reiterate BUY; TP raised to Rp5,400 as we

reinstate our initial 15% ROE target

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F Pre-prov. Profit 9,375 10,454 12,150 13,836 Net Profit 2,670 4,241 5,343 6,467 Net Pft (Pre Ex.) 3,126 4,241 5,343 6,467 Net Pft Gth (Pre-ex) (%) 30.6 35.7 26.0 21.0 EPS (Rp) 280 444 560 678 EPS Pre Ex. (Rp) 328 444 560 678 EPS Gth Pre Ex (%) 31 36 26 21 Diluted EPS (Rp) 280 444 560 678 PE Pre Ex. (X) 14.6 10.7 8.5 7.0 Net DPS (Rp) 75.2 83.9 178 280 Div Yield (%) 1.6 1.8 3.7 5.9 ROAE Pre Ex. (%) 8.9 11.2 12.9 14.4 ROAE (%) 7.6 11.2 12.9 14.4 ROA (%) 1.5 2.3 2.7 2.9 BV Per Share (Rp) 3,766 4,140 4,522 4,920 P/Book Value (x) 1.3 1.2 1.1 1.0 Earnings Rev (%): 2 2 - Consensus EPS (Rp): 386 450 - Other Broker Recs: B: 4 S: 6 H: 12

Source of all data on this page: Company, DBS Bank, DBSVI, Bloomberg Finance L.P.

Ready for growth Foundation is set; ready for growth; maintain BUY. FY16 marked the first full year of its transformation programme (recall that its 3-year transformation strategy was initiated in March 2016). Bank Danamon (BDMN) has delivered two key items on its list – improved NIM via lower funding cost and reduced expenses (ex-restructuring costs). In addition, its SME loans have started to pick up and Adira Dinamika Multifinance (Adira) is gradually turning around. With its transformational initiatives setting a strong base in FY16, we believe the bank is ready for growth. The impact from its transformation programme should be fully reflected from 2017. Maintain BUY. FY16 delivered as expected, ex-one-off items. Excluding the tax adjustment related to the tax amnesty participation, BDMN delivered a 31% earnings growth in FY16 with improved NIM from lower funding cost and reduced expenses. 4Q16 saw a first turnaround in loan growth supported by SME and commercial loans. Credit costs remained high particularly related its micro business (Danamon Simpan Pinjam, DSP) which is currently undergoing a revamp in its business model. Adira has also started to grow. Fee income saw a boost from its insurance business, which still has potential to grow. Excluding the one-off item, BDMN would have delivered an ROE closer to 9%. Adira to pick up speed in 2017. We met the CEO and CFO of Adira to understand its transformation story. We believe that Adira will play a crucial role in steering BDMN’s growth ahead. There are ample cross-selling opportunities to be reaped, which will benefit both Adira and BDMN. Stay tuned for this in FY17. Double-digit ROEs over time. We expect a double-digit ROE in FY17 as its new revenue engines fire up. BDMN will start FY17 with a lower cost base and a cleaner balance sheet. Loan growth should start to pick up while its funding mix still has room to improve. We remain bullish on FY17-18F earnings; our forecasts remain above consensus. Valuation:

Reiterate BUY; ready for growth. Our new TP of Rp5,400 is derived from the reinstatement of our initial 15% ROE target to our valuation, based on the Gordon Growth Model (15% ROE, 10% growth and 13.9% cost of equity) implying 1.3x FY17 BV. Key Risks to Our View:

Ineffective transformation deliveries. Slower-than-expected growth could derail the subsequent transformation phase. Failure to improve the deposit franchise could further pressure NIM. At A Glance Issued Capital (m shrs) 9,585 Mkt. Cap (Rpbn/US$m) 45,719 / 3,422 Major Shareholders (%) Asia Financial (Indonesia) Pte. Ltd (%) 67.4

JPMCB – Franklin Templeton Inv. Funds 6.6 Free Float (%) 26.1 3m Avg. Daily Val (US$m) 0.69 ICB Industry : Financials / Banks

DBS Group Research . Equity 14 Mar 2017

Indonesia Company Guide

Bank Danamon Version 8 | Bloomberg: BDMN IJ | Reuters: BDMN.JK Refer to important disclosures at the end of this report

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Bank Danamon

WHAT’S NEW

Getting ready for the next phase: Growth

The next phase: Growth

Gaining momentum going into 2017. BDMN built a strong base in 2016 to gear up for 2017. By the first week of April, the senior management team to drive the bank forward will be complete. For 2017, we would expect lower NIM trends ahead as the loan mix changes, but lower expenses and provisions should make up for earnings over time. NIM will likely slide as the loan mix skews towards SME loans which are mainly secured. But this portfolio will also come with significantly lower credit cost and expenses. Comparatively, the credit cost for micro loans is in excess of 8% but credit cost for SME would be below 1% (this portfolio is deemed to have lower risk). Expenses will be lower as the bank scales down its labour-intensive micro business (typically requiring more employees to be surveyors and for collections). Cost-to-income ratio should stay below 50%. Provisions should also decline. All in, the lower NIM will be compensated by lower funding costs, lower expenses, higher fee income and lower provisions.

Ready for growth. With the recovery of its loans in 2017, earnings are well poised for growth. On a normalised basis (ex-one-offs) we forecast FY17 earnings growth of >30%, repeating the earnings growth trend in FY16, the difference being underlying growth. In FY16, earnings growth was driven by higher NIM and lower expenses. In FY17, we expect earnings to be driven by loan growth recovery, lower provisions and well-managed expenses. Loan growth for 2017 should range at 7-8%, driven by SME, commercial and consumer, while micro loans continue to decline. Auto loans should start to turn around, picking up the positive traction it gained in 4Q16.

Micro banking turnaround strategy. Management is re-engineering its micro lending business (Danamon Simpan Pinjam (DSP)). BDMN has seen its micro loans run down by 30% y-o-y in 2016. Such trends are likely to continue in 2017. Management has decided to split the DSP business into a “good bank” (micro banking branches) and “bad bank” (special asset branches) where it will gradually see the winding down/rationalisation of the special asset branches over time. It will focus on revamping the business model to improve efficiency and automation of the “good bank”. The landscape for micro lending business has changed since the revamp of the KUR scheme in August 2015. The single-digit lending rate KUR loans extended have been disrupting the existing micro banking landscape for players other than Bank Rakyat Indonesia (BBRI). BDMN is not the only bank scaling down on its micro business. Without DSP, BDMN’s key financials have showed improvement.

BDMN: With and without DSP

With DSP Without DSP FY15 FY16 y-o-y% FY15 FY16 y-o-y%

NIM 8.2 8.9 0.7 6.5 7.5 1.0 Credit cost 3.8 3.5 -0.3 2.4 2.4 - Cost-to-income 52.0 48.8 -3.2 50.2 46.0 -4.2 Pre-tax profit 3,206 4,456 38.9% 3,735 5,180 38.7% ROAE 7.5 8.0 0.5 9.2 9.5 0.3

Source: Company, DBS Bank, DBSVI

BDMN: DSP outlets/loan growth trends

Source: Company, DBS Bank, DBS Vickers

Adira’s transformation story. Similar to its parent company, BDMN, Adira has also been going through a transformation phase. Adira’s business has been hurt the past three years due to a combination of regulatory changes (changes in down payment regulations, increase in minimum wages) and a slowdown in the auto industry (due to lower commodity prices). In 2015, Adira underwent a revisit of its business model, particularly in its operations. Three key things topped management’s agenda: (1) The need to defend Adira’s household branding and ensuring its footprint remains strong throughout Indonesia – Adira would need to deepen its relationship with its customers and attempt to bundle products (auto + insurance products); (2) Improve efficiency –As part of its efficiency efforts, Adira had reduced its number of outlets in the past two years where nearby outlets were combined. Adira has moved to digitise its business. The success of these two efforts combined was evident in 2016 where opex remained flat. Digitising its business processes will be a multi-year exercise. Expect more efficiency gains to emerge from here; (3) Growing new businesses – Multi finance companies were allowed to finance multipurpose loans, re-financing and infrastructure loans in 2014. Adira should be able to tap on its rich customer base, coupled with its strong relationships with auto dealers and vendors. In addition, cross-selling opportunities with BDMN is also part of the group transformation agenda. We should expect more Adira-BDMN synergies going forward. Over 2016, we

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Company Guide

Bank Danamon

understand that Adira had benefitted from lower funding costs, thanks to BDMN.

Adira’s recovery and its prospects. Nevertheless, Adira remains a crucial part to BDMN’s business. Despite setbacks, Adira has consistently maintained its market share ranking at #2 for the 2W business with a market share of 13-14%, after Federal International Finance (FIF), Astra’s 2W multi finance company. Adira’s 4W business remains small with a market share of only 4-5%. Adira saw a recovery in its new sales for both 2W and 4W in 4Q16. We believe the auto industry is set to see an improvement in 2017. Adira expects 2017 new bookings of 10-15%, which should translate to approximately a 5% receivables growth. We understand that Adira is gradually shifting its portfolio towards 4W given its better prospects expected. Indonesia’s 4W penetration is low. With rising GDP per capita in coming years, growth prospects for 4W business should outweigh the more saturated 2W market.

Auto: 4W sales trend – Recovery after severely hit

Source: Gaikindo; DBS Bank, DBSVI

Auto: 2W sales trend – Improving by slower growth

Source: AISI; DBS Bank, DBS Bank, DBSVI

Fee income potential. BDMN’s credit-related fees fell in FY16 due to the soft loan trends. Positively, fee income generation from general insurance, bancassurance and cash management have shown promising growth trends. We

believe BDMN should continue to show fee income growth ahead. Additional fee income synergies with Adira could boost growth over time.

Asset quality on a better footing. FY15-16 asset quality issues have largely been effects from the weakening commodity prices across the loan segments. We believe the worst of the asset quality issues are over for BDMN. We expect credit costs to decline in FY17 – a combination of better loan growth and lower absolute provisions. NPL ratios should correspondingly improve.

Double-digit ROEs over time. Management’s target is to achieve double-digit ROEs over time. And that can only be possible once the current engines are revived and new revenue engines start to fire up. With the lower cost base and a cleaner balance sheet, we expect ROEs to improve over time. Excluding the one-off items in FY16, ROE would have been closer to 9%. We expect ROE to cross the 10% mark in FY17 as loan growth starts to pick up and funding costs head lower.

Capital management plans are on the cards. Its dividend policy has yet to be instituted. We believe over time, dividend payout will be raised. This would complement the driver towards the double-digit ROE. BDMN’s current dividend payout ratio is 30%. Every 10% increase in dividend payout would boost ROE by 10bps. Separately, BDMN remains a BUKU III bank (capital levels at Rp5-30tr).

4Q/FY16 results review:

Delivered as expected. Excluding the one-off tax adjustment made in 4Q16 of Rp456bn and the Rp260bn restructuring costs, Bank Danamon’s (BDMN) 4Q/FY16 earnings were in line with our forecast, albeit slightly ahead of consensus estimates. Management delivered as promised on improved NIM and lower expenses. NIM improved on sustained funding cost improvement. Excluding micro loans, (normalised) NIM would be at 7.5% (vs 8.9% including micro loans). Fee income was higher, driven largely by insurance. Expenses fell on its disciplined cost management. Absolute provisions declined 12% y-o-y but credit cost stayed high at 3.5%, mainly because of the denominator effect on slower loan growth. The one-off tax adjustment relates to the bank’s participation in the tax amnesty programme which required previous taxes accrued to be written off. The restructuring costs were related to outlet rationalisation from its micro business.

Loan growth picked up in 4Q16; micro loans continued to slip. Loans grew 4% q-o-q, 2% y-o-y, driven by SME (+3% q-o-q, +10% y-o-y) and commercial loans (+9% q-o-q, +11% y-o-y). Auto loans fell y-o-y but improved q-o-q (2W: +1% q-o-q, -7% y-o-y; 4W: +2% q-o-q, -3% y-o-y) due to industry pressures. Micro loans continued to slip as expected as

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Company Guide

Bank Danamon

management has taken the stance to scale down this business.

Quality deposits on the rise. Overall deposits fell as the bank continued to shed expensive deposits. Q-o-q trends for CASA have been promising and have been on the rise since 2Q16 (4Q16: +6% q-o-q). BDMN was able to recalibrate its deposit profile amid slower loan growth.

Asset quality improved; capital stayed strong. Absolute NPLs fell 4% y-o-y but NPL ratio rose to 3.1%, due to the slower loan growth (denominator effect). Loan loss coverage rose to 117%. BDMN saw a 9% decline in its restructured loans in FY16. Loan at risk was on a q-o-q declining trend, coming in at 12.1% in 4Q16 (vs 12.9% in 3Q16). Separately, BDMN’s total CAR stood strong at 21%. Its capital remained at high levels and this is one of the reasons why ROE has been suppressed. BDMN is one of the few banks that has not revalued its assets. It will consider such a move at an appropriate time when a capital management plan is laid out.

Valuation and recommendation

Reiterate BUY; ready for growth. Our new TP of Rp5,400 is derived at as we reinstate our initial 15% ROE target to our valuation, based on the Gordon Growth Model (15% ROE, 10% growth and 13.9% cost of equity) implying 1.3x FY17 BV. Our FY17-18F earnings are tweaked marginally (+2% each year) after taking into account slightly stronger fee

income growth. The impact from its transformation programme should be fully reflected from 2017.

BDMN: Key milestones – 2015-17 strategy

Source: Company


Company Guide

Bank Danamon

Quarterly / Interim Income Statement (Rpbn)

FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq FY2015 FY2016 % chg yoy

Net Interest Income 3,513 3,498 3,585 2.1 2.5 13,648 13,779 1.0

Non-Interest Income 1,160 1,175 1,189 2.6 1.2 4,608 4,693 1.8

Operating Income 4,672 4,673 4,775 2.2 2.2 18,257 18,472 1.2

Operating Expenses (2,021) (2,489) (2,281) 12.9 (8.4) (9,231) (9,096) (1.5)

Pre-Provision Profit 2,651 2,184 2,493 (6.0) 14.2 9,026 9,375 3.9

Provisions (1,364) (1,118) (1,000) (26.7) (10.6) (5,082) (4,441) (12.6)

Associates 0.0 0.0 0.0 nm nm 0.0 0.0 nm

Exceptionals 0.0 0.0 0.0 nm nm 0.0 0.0 nm

Pretax Profit 688 1,074 924 34.3 (14.0) 3,282 4,393 33.9

Taxation (166) (256) (749) 350.5 192.2 (812) (1,600) >100.0

Minority Interests (25.0) (36.2) (21.5) 14.0 (40.6) (75.9) (123) 62.1

Net Profit 497 782 153 (69.1) (80.4) 2,393 2,670 11.6

Restructuring cost 182 0.0 260 nm nm 182 260 nm

Tax adjustment 0.0 0.0 456 nm nm 0.0 456 nm

Net Profit (adjusted) 679 782 869 28.0 11.1 2,575 3,386 31.4

Growth (%)

Net Interest Income Gth (2.6) 1.0 2.5 (0.2) 1.0

Net Profit Gth (22.9) (15.1) (80.4) (8.1) 11.5

Key ratio (%)

NIM 8.6 8.9 9.4 8.2 8.6

NPL ratio 3.3 4.0 3.5 3.3 3.5

Loan-to deposit (adjusted) 87.5 97.6 91.0 87.5 91.0

Cost-to-income 43.3 53.3 47.8 50.6 49.2

Total CAR 19.7 22.9 20.9 19.7 20.9

Source of all data: Company, DBS Bank, DBSVI


Company Guide

Bank Danamon

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Picking up steam. We forecast 8% loan growth in FY17F driven by the commercial, SME and retail segment. Auto loans at Adira Finance (ADMF) is expected to turn positive (from a contraction in FY15). The Danamon Simpan Pinjam (DSP) or micro business is expected to stay muted as management is in the midst of recalibrating its business model. The worst of asset quality should be over, in our view. Provisions should edge off from current levels. Loan growth to resume in 2017 (ex-micro). Loans were mainly contracting in 2016 because of the rundown of auto loans (industry weakness) as well as micro loans (more sharply and deliberate). The decline in consumer loans in 2016 was a result of reducing its exposure to unsecured lending. Green shoots for growth was seen in retail and SME in 2H16. In 2017, while micro loans will still slide, a recovery is expected for auto loans at Adira, SME and retail loans should continue its traction and commercial loans will start to show growth by middle of the year. A segment called “asset-based financing” which is largely related to the plantation segment will be reduced Lower NIM trends ahead as loan mix changes...NIM will likely slide as the loan mix changes towards SME loans which are mainly secured. On the other hand, cost of funds reduction would not be as significant as this year. Positively, fee income should start to improve as retail and SME loans pick up. But lower expenses and provisions should make up for earnings over time. The less risky portfolio should also come with significantly lower credit cost and expenses. Comparatively, the credit cost for micro loans is in excess of 8% but credit cost for SME would be below 1% (this portfolio is deemed to have lower risk). Expenses will be lower as the bank scales down its labour-intensive micro business (typically requiring more employees to be surveyors and for collections). Provisions should also decline. All in, the lower NIM will be compensated by lower funding costs, lower expenses, higher fee income and lower provisions. With the recovery of its loans in 2017, earnings are well poised for growth. Separately, the pressure by regulators have somewhat cooled off. That said, new loan products by BDMN (e.g. mortgage and SME loans) are at single-digit levels. Further cost reduction likely as efficiency improves. There was another round of “restructuring costs” booked in 4Q16 (similar to that recorded in 4Q15). There is still room for further cost reduction when efficiency improves mainly from branch/outlet rationalisation in 2017. Cost-to-income ratio should stay below 50%.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure



Company Guide

Bank Danamon

Balance Sheet:

Improved funding franchise would be key. BDMN has long been seen to be a bank with a weak funding franchise. We have seen improvements in recent quarters, albeit gradual. Loan-to-deposit ratios have trended down. Further improvements should be expected as its strategic initiatives unfold. Asset quality under control. We expect BDMN to show lower credit cost levels in FY17F. BDMN has among the lowest percentage of restructured loans to total loans (c. 3%). This is also because auto loans (both 2W and 4W from Adira) and micro loans have automatic write-off policies of 180 days and 360 days respectively. Loan loss coverage ratios should correspondingly improve. NPL ratios should improve below 3% for 2017. Share Price Drivers:

Sustained deliveries of strategic priorities. It has been two years since Mr Sng Seow Wah came on board as BDMN’s CEO. His 3-year strategic priorities were crafted out in early 2016. Early wins are visible. He has a strong track record in turning around banks with exposure to SME and consumer segments. He had successfully improved the business and profitability of a Malaysian bank, thus increasing its valuation. He also initiated a high dividend payout ratio policy to share the bank’s success with shareholders. We believe BDMN should see similar success under his leadership. Year 2 of transformation; growth phase. After two years of painful restructuring and cleaning up its balance sheet, BDMN is not ready for growth. The ability of BDMN to show strong growth in targeted areas as part of its transformation programme would be imperative to the next re-rating phase for the stock. Our initial blue-sky scenario (see our reinitiation report dated 18 March 2015) stipulating a 15% ROE is closer to being materialised. Key Risks:

Ineffective transformation deliveries. This would be mainly due to slower-than-expected changes in business processes and the new business model being ineffective. But these changes will take time and resources to implement. Failure of the transformation programme will not only impact operations and profitability, but the opportunity cost would magnify the impact. The other key risks for BDMN are failure to maintain liquidity and weaker-than-expected deposit growth since its loan-to-deposit ratio has always been high. Company Background

Bank Danamon (BDMN) is the sixth largest bank in Indonesia by assets. The bank focuses on mass market loans with its Danamon Simpan Pinjam. BDMN is aided by its 95%-owned multifinance arm Adira Finance for auto loans.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

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Company Guide

Bank Danamon

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Gross Loans Growth (6.1) (7.4) 8.0 12.0 12.0 Customer Deposits Growth (1.2) (9.9) 9.8 11.3 11.4 Yld. On Earnings Assets 13.5 12.9 12.9 12.7 12.4 Avg Cost Of Funds 5.6 4.8 4.7 4.6 4.5 Income Statement (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F Net Interest Income 13,648 13,779 14,733 16,173 17,614 Non-Interest Income 4,608 4,693 4,785 5,578 6,354

Operating Income 18,257 18,472 19,518 21,751 23,967 Operating Expenses (9,231) (9,096) (9,064) (9,602) (10,132)

Pre-provision Profit 9,026 9,375 10,454 12,150 13,836 Provisions (5,082) (4,441) (4,011) (4,048) (4,038) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 3,282 4,393 5,737 7,213 8,723 Taxation (812) (1,600) (1,434) (1,803) (2,181) Minority Interests (75.9) (123) (61.7) (67.3) (75.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 2,393 2,670 4,241 5,343 6,467 Net Profit bef Except 2,393 2,670 4,241 5,343 6,467 Growth (%) Net Interest Income Gth (0.2) 1.0 6.9 9.8 8.9 Net Profit Gth (8.1) 11.5 58.9 26.0 21.0

Margins, Costs & Efficiency (%) Spread 7.9 8.1 8.2 8.1 7.9 Net Interest Margin 8.2 8.6 8.8 8.7 8.5 Cost-to-Income Ratio 50.6 49.2 46.4 44.1 42.3

Business Mix (%) Net Int. Inc / Opg Inc. 74.8 74.6 75.5 74.4 73.5 Non-Int. Inc / Opg inc. 25.2 25.4 24.5 25.6 26.5 Fee Inc / Opg Income 21.0 19.7 20.4 21.0 21.8 Oth Non-Int Inc/Opg Inc 4.2 5.7 4.1 4.7 4.7

Profitability (%) ROAE Pre Ex. 7.2 8.9 11.2 12.9 14.4 ROAE 7.2 7.6 11.2 12.9 14.4 ROA Pre Ex. 1.3 1.5 2.3 2.7 2.9 ROA 1.3 1.5 2.3 2.7 2.9


Visible NIM improvement from lower funding costs; NIM will slide from here as loan mix changes, but impact to earnings will be offset by improved fee income

Targeting double-digit ROE over time


Company Guide

Bank Danamon

Quarterly / Interim Income Statement (Rpbn)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Net Interest Income 3,513 3,451 3,462 3,498 3,585 Non-Interest Income 1,160 1,189 1,216 1,175 1,189

Operating Income 4,672 4,640 4,677 4,673 4,775 Operating Expenses (2,021) (2,339) (2,363) (2,489) (2,281)

Pre-Provision Profit 2,651 2,301 2,314 2,184 2,493 Provisions (1,364) (1,178) (1,063) (1,118) (1,000) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax Profit 688 1,127 1,268 1,074 924 Taxation (166) (282) (313) (256) (749) Minority Interests (25.0) (31.7) (33.9) (36.2) (21.5)

Net Profit 497 814 921 782 153 Growth (%) Net Interest Income Gth (2.6) (1.7) 0.3 1.0 2.5 Net Profit Gth (22.9) 63.8 13.2 (15.1) (80.4)

Balance Sheet (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F Cash/Bank Balance 16,105 11,386 11,119 13,451 15,976 Government Securities 6,916 9,563 11,476 13,771 16,525 Inter Bank Assets 17,983 5,937 7,125 7,838 8,621 Total Net Loans & Advs. 99,483 91,889 99,441 111,404 124,892 Investment 6,392 17,408 19,633 22,079 24,771 Associates 0.0 0.0 0.0 0.0 0.0 Fixed Assets 2,559 2,506 2,444 2,374 2,295 Goodwill 1,427 1,470 1,470 1,470 1,470 Other Assets 37,193 33,928 40,036 39,857 40,128

Total Assets 188,057 174,087 192,743 212,243 234,680 Customer Deposits 115,142 103,740 113,938 126,774 141,197 Inter Bank Deposits 1,826 2,873 2,350 2,611 2,480 Debts/Borrowings 22,800 19,813 23,775 27,161 31,086 Others 14,075 11,284 12,679 11,981 12,330 Minorities 283 435 497 564 639 Shareholders' Funds 33,932 35,943 39,505 43,152 46,947

Total Liab& S/H’s Funds 188,057 174,087 192,743 212,243 234,680


Dented by one-off tax adjusted of Rp456bn and restructuring costs of Rp260bn (4Q15: Rp182bn)

Loan growth to resume; 4Q16 showed positive pick-up in SME, commercial and auto loans


Company Guide

Bank Danamon

Financial Stability Measures (%)

FY Dec 2015A 2016A 2017F 2018F 2019F Balance Sheet Structure Loan-to-Deposit Ratio 86.4 88.6 87.3 87.9 88.5 Net Loans / Total Assets 52.9 52.8 51.6 52.5 53.2 Investment / Total Assets 3.4 10.0 10.2 10.4 10.6 Cust . Dep./Int. Bear. Liab. 73.7 71.8 78.5 78.3 77.8 Interbank Dep / Int. Bear. 1.2 2.0 1.6 1.6 1.4

Asset Quality NPL / Total Gross Loans 3.3 3.5 2.9 2.6 2.5 NPL / Total Assets 1.8 1.9 1.5 1.4 1.4 Loan Loss Reserve Coverage 99.4 100.7 113.7 125.3 126.3 Provision Charge-Off Rate 4.9 4.7 3.9 3.5 3.1

Capital Strength Total CAR 18.6 21.1 21.1 22.8 22.6 Tier-1 CAR 18.0 20.5 20.5 22.1 21.9


Target Price & Ratings History

Source: DBS Bank, DBSVI

Analyst: Sue Lin LIM

Benedictus Agung SWANDONO

NPL ratios to improve as absolute NPLs taper off and loan growth picks up


Company Guide

Bank Danamon

DBS Bank, DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 13 Mar 2017 18:22:16 (WIB) Dissemination Date: 13 Mar 2017 18:34:33 (WIB)

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd, PT DBS Vickers Sekuritas (Indonesia) (''DBSVI''). This report is solely intended for the clients of DBS Bank

Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or

duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd, PT DBS Vickers Sekuritas (Indonesia)

(''DBSVI'').

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other

factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or

warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without

notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific

investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees

only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial

advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)

arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not

to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons

associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may

not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to

update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED

UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.


Company Guide

Bank Danamon

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public

offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage

in market-making.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)

primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the

issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real

estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the

management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or

his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment

banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment

banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the

DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 28 Feb 2017.

2. PT DBS Vickers Sekuritas Indonesia (''DBSVI'') does not have a proprietary position in the securities recommended in this report as of 28 Feb

2017.

3. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research

Report.

Compensation for investment banking services:

4. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

5. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his

spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.


Company Guide

Bank Danamon

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.

198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.


Company Guide

Bank Danamon

United Kingdom

This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd, PT DBS Vickers Sekuritas (Indonesia) (''DBSVI'') 12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

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