Valuation and earnings revisions. We downgrade Bank Mandiri (BMRI) to HOLD from BUY, as we believe the bank’s capital adequacy may not be enough to support above-trend loan growth while maintaining attractive shareholder returns. Moreover, the combination of rising RWA density and tighter Basel III capital buffers may limit BMRI’s flexibility to sustain both high growth and generous dividends.

Historically, Mandiri maintained stable payout ratios of around 50% from 2001-2006, before a one-off dividend spike in 2007 triggered a multi-year capital rebuild exercise that lasted until 2014. In 2008, the bank’s valuation derated to 0.7x P/B, but rerated sharply as earnings and loan growth recovered amid light capital requirements. In contrast, today’s environment is more structurally constrained. In 2016, Mandiri temporarily lifted its dividend payout due to the Basel III recognition of revaluation surplus—a non-repeatable boost to CET1. With the current capital headroom tightening and RWA pressure rising, we believe Mandiri will revert to a 30% payout policy, limiting dividend yield and ROE expansion..

We also cut our earnings forecast for FY25F and FY26F by 7% and 17%, respectively, reflecting a softer loan growth outlook of ~8.3% 24-27F CAGR (cons: 9.7% 24-27F CAGR) and rising funding cost pressures stemming from higher fund borrowings portion and massive TD expansion in 1H25. Our forecast is also 6% below consensus for FY25F and 15% below for FY26F. With medium term ROE expected to normalise around 15%-17% and limited catalysts for multiple expansion, we expect Mandiri’s valuation to be at STD-2 10 year average.

Overgenerous payout undermines capital and growth visibility. Following Mandiri’s dividend disbursement, its capital continues to erode despite remaining above the 14.7% regulatory requirement,  at 18.5% consolidated as of March 2025. The 14.7% capital requirement assumes a 0% Countercyclical Capital Buffer (CCyB), as is currently the case. However, we believe the internal target of 18%-20% capital adequacy ratio (CAR) at the bank-only level (1Q25: 17.3%) is too ambitious given its dividend policy, consensus expectations of a >60% payout ratio over the next three years, and aggressive loan growth target. While the full year basis can be achieved at the lower end of their internal target, given the ambitious payout ratio, eventually it will be hard for Mandiri to catch up given the weak earnings formation due to funding cost pressure and reserve formation. Additionally, the RWA density that keeps rising, make it harder for Mandiri to sustain their payout ratio target.

Although Mandiri complies with its regulatory capital requirements, its capitalisation appears thin relative to domestic peers. As of March 2025, the average CAR across Indonesian banks stood at 25.4%, while Mandiri’s consolidated CAR was only 18.5% — placing it significantly below the industry average. This is particularly notable given Mandiri’s status as a domestic systemically important bank (D-SIB) along with 19 other banks in Indonesia. In an environment where most peers maintain large capital buffers, Mandiri’s thinner cushion may limit its financial flexibility, especially in periods of credit expansion, earnings volatility, or rising capital requirements. This undercapitalisation risk could weigh on its valuation, capital return potential, and investor confidence.

While Mandiri’s capital appears low relative to Indonesia banks, it is roughly in line with the regional average for Malaysian and Singaporean banks. However, this is primarily due to the lower RWA density of Malaysian and Singaporean banks, which we will discuss later.

An overleveraged bank among big banks in Indonesia. While other large banks in Indonesia maintain their leverage levels, Mandiri’s has shrunk since 2021, widening the gap with other B4B members. As of 1Q25, the difference between Mandiri and BNI (the second most leveraged B4B bank) is 435bps, compared to virtually zero at the beginning of the Covid pandemic.

We measure leverage using tangible common equity (TCE) divided by tangible assets (TA) to remove the impact of intangibles and unrealised equity items. We also note Mandiri’s leverage ratio has declined y/y for the past five quarters. Additionally, massive dividend disbursements have caused Mandiri’s tangible common equity (TCE) growth to lag tangible asset (TA) growth over the same period. As of 1Q25, Mandiri’s tangible leverage ratio stands at 8.7%, while that of its local peers averaged 14%.

However, compared regionally to Malaysian and Singaporean banks, Mandiri’s leverage seems normal. As of 2024, the average tangible leverage ratio stands at 8.6%, only slightly below Mandiri’s 1Q25 level. This mainly can be attributable to lower RWA density in Malaysian and Singaporean banks.

Capital constraints limit growth ambitions. Despite massive dividend payouts, Bank Mandiri maintains an ambitious loan growth target of 10%-12% (BI FY25F revised guidance: 8%-11%, initial guidance: 11%-13%). However, we are not fully confident in Mandiri’s capability to deliver on these targets due to rising RWA density at both bank-only and consolidated levels since FY22, as this suggests increased risk alongside portfolio growth. We project loan growth of 8.0% and 8.5% for FY25 and FY26, respectively, given the capital constraints. Discouraging 5M25 YTD loan growth (bank-only: negative 10bps) further suggests the bank may struggle to meet its loan growth guidance.

We also compared Bank Mandiri’s RWA density to its local peers. Since 2022, at both the bank-only and consolidated levels, Mandiri’s peers had lower overall RWA density due to the implementation of a rule in the operational RWA calculation in early 2023. However, Mandiri’s overall RWA density has continued to rise since 2022, as it booked a higher loan portion relative to the total interest-earning assets at both levels, with an increase of 8.3% and 9.5%, respectively, from FY22 to 1Q25.

From 4Q22 to 1Q25, Mandiri’s bank-only and consolidated loan portions to total interest-earning assets rose significantly, from 62.8% and 63.8% to 72.1% and 72.3%, respectively. This indicates aggressive loan growth throughout 2023 and 2024, exceeding guidance and reducing exposure to other interest-earning assets.

We also conducted a peer sensitivity analysis, where we adjust each bank’s regulatory minimum CAR upward, based on how much their RWA density would need to rise to match Mandiri’s level (60.7%). Using a regression-derived elasticity of 0.4649, we estimate that most peer banks would see their minimum CAR requirement increase by approximately 20bps under this scenario. Despite this adjustment, the majority of peers would still maintain significantly wider capital buffers compared to Mandiri. The median capital headroom—defined as actual CAR minus adjusted minimum CAR—stands at 7.6%, well above Mandiri’s 3.8% on a consolidated basis. This reinforces the view that Mandiri’s capital position is structurally tighter, even when normalising for risk levels, and may constrain its ability to absorb shocks, pursue growth, or sustain competitive capital returns relative to peers.

When comparing Mandiri’s actual CAR against its regulatory minimum and its risk-profile-based minimum, the bank ranks among the weakest capitalised institutions in the country. Out of the top 30 listed banks in Indonesia, Mandiri ranks third from the bottom in terms of the excess capital it holds above the regulatory minimum CAR, and fourth from the bottom when measured against the minimum CAR implied by its assigned risk profile. This suggests that Mandiri maintains only a slim capital buffer — both in absolute terms and when adjusted for its composite risk.

As a D-SIB with an average RWA density in Indonesia, Mandiri would be expected to maintain a more conservative capital position relative to its peers. However, the data implies the opposite: Mandiri’s capital cushion is not only well below the industry average but also thin relative to its risk, raising questions about its ability to absorb shocks or pursue aggressive balance sheet growth without breaching regulatory thresholds. In our view, this structurally weak capital position reduces strategic flexibility and heightens downside risk, especially if macro or credit conditions deteriorate. 

Weaker dividends are expected. Given the aforementioned factors, we anticipate Mandiri will prioritise capital preservation. While Mandiri experienced significant growth from 2020 to 2023, earnings have plateaued over the past eight quarters, even as  Mandiri maintained a 60% payout ratio from 2018 to 2023 based on net profit after tax (NPAT). In 2024, Mandiri unexpectedly increased its payout ratio to 78% despite zero earnings growth in the year. As this erodes the bank’s capital, we expect Mandiri to reduce its payout ratio. We project a 30% payout ratio over the next three years, enabling the bank to rebuild capital to 18%-20% (bank-only) and improve leverage.   

Dividend scenario and sensitivity analysis. To assess the potential capital impact of various dividend policies, we ran a sensitivity analysis using 30% as our base case payout ratio. This conservative stance assumes Mandiri prioritises rebuilding capital over maximising shareholder distribution. Under this scenario, the bank retains a larger portion of earnings, supporting a gradual improvement in capital buffers. Our estimates suggest that maintaining a 30% payout could help TCE/TA recover toward the 9%-11% range over the next two to three years, closing their gap with their peers, with CAR stabilising at around 19%. ROE may appear slightly lower in the short term due to reduced leverage, but the quality and sustainability of returns should improve as retained earnings strengthen the balance sheet.

In contrast, a return to higher payout scenarios—such as 50% or even 70%—would provide only marginal uplift to ROE, while eroding capital resilience. At a 70% payout, TCE/TA stays at 9.6% and CAR may compress toward the 17% handle in the next three years, leaving little headroom above regulatory minimums, especially if credit costs or loan growth re-accelerate. The risk-reward profile under these aggressive distributions becomes skewed, as the short-term benefit to ROE is outweighed by the weakening of Mandiri’s loss-absorbing capacity and strategic flexibility. As such, we believe the market is underestimating the structural capital rebuilding imperative, and our scenario analysis reinforces the need for a disciplined payout approach in the medium term.