PT Bank
Mandiri (Persero) Tbk ADR (PPERY, $8.69): “Will Bank Mandiri Continue to Run
Despite Weaker than Expectation Results?”
By: Nicholas Christman, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This
article was written by myself, and it expresses my own opinions. I am not
receiving compensation for it and I have no business relationship with any
company whose stock is mentioned in this article.
Summary
• Bank Mandiri (OTC:PPERY) is a state owned Indonesian-based holding company that operates in the
commercial banking sector. The bank was formed in 1998 during the Asian
Financial Crisis, when the Indonesian government consolidated four large,
struggling banks.
• Mandiri’s stock price has
been one of the top performers in the international portfolio returning 26.2%
in the last six months.
• Despite strong stock
performance, YoY net income has decreased each of the last six quarters as loan
loss provisions have come up on higher costs of credit.
• Mandiri’s performance can
be explained by the improving macro factors affecting the future forecast for
earnings and net interest margins.
• Improving
legacy credit costs and asset flows on the recent repatriation bill will
continue to boost the stock despite the recent weaker quarterly results.
Key points: Several
factors have driven Bank Mandiri’s outperformance in the AIM International
Equity. The recent turmoil in the UK and global interest rate slump has driven
strong inflows into emerging market investments. The strong inflows have
stabilized the Indonesian rupiah, which had been a recent economic headwind for
the country. The strong inflows have allowed the government to get ahead of
schedule with bond issuances, with expected full year issuance targets to be
reached in November.
Mandiri has also benefitted
from the tax amnesty program that allowed citizens to bring assets back to
Indonesia for reduced tax rates and penalties. The program has added $7 billion
to the state revenue and many of the assets are expected to end up within the
state-owned bank network. The recent efforts of President Jokowi to reform the tax
code to attract foreign investment will continue to be long-term structural
tailwind for Bank Mandiri.
Despite
weaker than expected results, Bank Mandiri has focused on reducing their
portfolio credit risk by focusing on risk management. Two near term negative
results has been lower loan growth than peers and higher loan loss provisions.
August loan growth was 9% YoY and provisions were 86% higher YoY. These two
negative affects are expected to be a near-term pain that will bring long-term
success.
Based on comments from a recent management non-deal
roadshow, there are several reasons to continue to be optimistic about the
future of Bank Mandiri. The bank has several channels of through which
efficiencies can be created. First, the bank will be focused on a lower
yielding lower risk portfolio to manage risk. Second, digitalization still
remains the biggest opportunity for Bank Mandiri, and the expansion of
Indonesian infrastructure will only aid this process. Lastly, they can focus on
making their country-leading payroll more efficient by improving technology
within their branch network.
What
has the stock done lately?
Bank Mandiri’s
US ADR has returned 17.24% in the last three months, and their performance can
somewhat be explained by the rebound in demand for emerging market equities.
The additional outperformance is likely result of the strong underperformance
of the bank in 2015 and the first half of 2016. The stock has stayed relatively
quiet in recent weeks, as investors wait for better financial results before
feeling comfortable with a higher price.
Past
Year Performance:
Bank Mandiri
share price has increased 22.66% in the past year, and paid a $.20 dividend per
share. The positive economic and political backdrop in Indonesia has been a
significant driver return for the company. With the Indonesian Rupiah
strengthening 4.67% over the past year, the countries financial system has
benefitted from the reduced stress from currency depreciation.
Source: FactSet
My
Takeaway
Bank Mandiri
represents an important investment in the AIM international portfolio because
it’s one of the few pure-play emerging markets investments. The company has a
bright future with significant opportunities to take advantage of strong net
interest margins (between 5.4%-6% for the last 12 months), the build out of the
Indonesian financial system and economy as a whole, and strong inflows caused
by governmental incentives to bring back offshore assets.
