Digital banks: Best of both worlds - dmia.danareksaonline.com

Equity Research Banking

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Friday,01 October 2021

Banking OVERWEIGHT

Digital banks: Best of both worlds

The COVID pandemic has led to more structural changes in the banking landscape, particularly in the digital realm due to mobility restrictions. The ability to tap the appropriate digital ecosystem and proper data analytics to build reliable credit scoring systems are the key factors. We also expect only a few digital banks to launch direct lending products in the near term while still depending on P2P channels to support loans growth. All in all, the ability to gain a sizable customer base to generate revenues and the execution supported by a valid credit scoring system are essential elements to come out on top in this new banking universe, in our view. The digital ecosystem is the key factor. We believe the right digital ecosystem and a definitive database are the two components for digital banks to succeed. With the massive and aggressive e-commerce platforms, many digital banks are looking to tap into these ecosystems. This is reasonable in our view as the platforms have sizable databases, both for customers and merchants, that can easily be used as the first screening process for potential borrowers. Nonetheless, the bank would also need to select which data can be used in the credit scoring model. This requires decent data analytics with the right personnel in place along with a knowledgeable management team as the approval time is a crucial factor in the mass-market segment. Regulators and sector environment: more supportive. OJK through its recent policies aims to provide more flexibility to banks to innovate through digital products/services as well as to create a level playing field with fintech players (there were 107 registered fintech companies as of September 2021). The asymmetric information between financial intermediaries and borrowers with proper data analytics and reliable credit scoring systems should be where digital banks get a competitive advantage, in our view.

Digital banks: the better version of banks and fintech. The c.62.0mn micro and small business owners in Indonesia are the low hanging fruit for digital banks. Digital banks have emphasised that they will utilize the supply chain approach to provide loans to their merchant borrowers (PO-based). For individual consumer loans, meanwhile, the lending product will usually be short-term and of a small ticket size. Given the short-term tenors in both segments, the number of potential borrowers and high volumes are vital factors to ensure sustainable business growth for digital banks. On the funding side, most of the digital banks will depend on the stickiness of merchants and customers in the respective ecosystems as most of them already maintain a certain amount in their e-wallets. With more banks shifting their focus to digital-oriented business, we believe that only a few will succeed supported by abundant potential customers coming from the ecosystem, a knowledgeable management team, and

OVERWEIGHT. We start with ARTO coverage on the back of its solid and knowledgeable management team with abundant growth opportunities coming from the Go-To digital ecosystem. Execution, ahead of fundamental valuations are to name but a few of the downside risks on digital bank names.

x

Eka Savitri

(62-21) 5091 4100 ext.3506

[email protected]

Andreas Kenny

(62-21) 5091 4100 ext.3509

[email protected]

Target Price

Market Cap. P/E (x) P/BV (x) ROE (%)

Company Ticker Rec (Rp) (RpBn) 2021F 2022F 2021F 2022F 2022F

Bank Jago ARTO IJ BUY 20,000 209,229 (10,037.7) 634.3 23.2 22.4 3.6 Bank Raya Indonesia AGRO IJ NOT RATED N/A 48,589 1,178.9 230.9 11.1 11.0 4.6

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The digital ecosystem is one of the key factors The pandemic has expedited the transition to online-based transactions

The COVID-19 pandemic which broke out in 2020 has led many people, particularly those who live in urban and suburban areas, to limit their daily activities. Activities including studying, working, and shopping for daily needs as well as banking transactions have mostly been done in the home. This has led to a shift from an offline to online (O2O) business model for several sectors, i.e. retail, food and beverages (F&B), and banks.

Additionally, the e-commerce players have also played a greater role given the change in consumer behavior, especially of those who live in first and second tier cities. This is partly due to their aggressive marketing gimmicks, with cashbacks and free delivery fees to name but a few. Tokopedia and Shopee are two main players that currently dominate the e-commerce space, offering a wide range of products and services. Both names claim to have more than 100 mn internet visits in the past six months (refer to Exhibit 1). Bukalapak, on the other hand, as the only e-commerce player already listed on the IDX, booked c.31.9mn internet visits in the last six months as the company focuses more on leveraging and monetizing its 5.0mn warung partners.

Exhibit 1: Key e-commerce players in Indonesia

Company General info Shareholders Traffic before pandemic Internet visits July 2021 (Last

6 months)

Bukalapak # of users: 90mn

Avg daily transactions: IDR2mn

GMV: USD3bn (2020)

TPV: IDR22.88tn

Employees: 2000+

PT Kreatif Media Karya (23.93%), API 9hong Kong) Investment Limited (13.05%), Archipelago Investment Pte. Ltd. (9.45%), Achmad Zaky Syaifudin (4.32%), Muhammad Fajrin Rasyid (2.64%), New Hope OCA Limited (3.16%). Batavia Incubator Pte. Ltd (2.47%), Mirae Asset-Naver Asia Growth Investment Pte. Ltd (1.80%), UBS AG, London Branch (1.86%), Willix Halim (1.40%), Others (37.32%)

70 million active users, 4.5 SME sellers, 131.7 million visits (2019)

31.9 Mn

Tokopedia # of users: 100mn GMV: USD14bn (2020) Employees: 4,700 (2019)

Softbank (35.35%), Alibaba Group (28.25%), Radiant (10.6%), Sequoia India (8.05%), William Tanuwijaya (4.66%), Anderson Investments (3.28%), Leontinus Alpha Edison (1.9%), Google (1.64%), East Ventures (1.08%), Dream Fund (1%)

Jan 2020: 7.2mn merchants, 90mn users

126mn

Shopee # of users: 93mn (2020) Avg daily transactions: IDR2.8mn GMV: USD14.2bn (2020) Employees: 20,000+

Sea Group shareholders Tencent: 39.7% Blue Dolphins Venture: 15% Forrest Li: 20% Gang Ye: 10%

2019: 55.9mn monthly users 141.6mn

Blibli # of users: 18.5mn Djarum Group, GDP Ventures 2019: 15-20mn monthly active users

18.3mn

Lazada # of users: 30.5mn

GMV: USD4.5bn (2020)

Alibaba, Temasek Holdings, Verlinvest, Rocket Internet, Kinnnevik AB, Tesco, Access Industries, HV Capital, TEC Ventures, Summit Partners

Q4 2018: 36.4mn monthly visits 28.5mn

Source: BRI Danareksa Sekuritas

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Plenty of growth opportunities for financial institutions

The big e-commerce players which own sizeable databases of customers attract banks and fintech companies to partner with them as the involved parties will share the database. Using the first principles design (build from scratch), the digital banks focus more on the customers’ needs and utilize the customer database to create customized products and services. The large database is also the underlying asset for the banks to build a proper underwriting and internal credit scoring system using data analytics. Such an approach applies not only for the end-customers (individuals) but also the merchants, the logistics companies and individual couriers (if any), in our view.

At a more micro level, by tracking the transactions from upstream to downstream (end-customers) the digital banks can obtain a better understanding of the volumes, patterns in certain areas, average transaction ticket size and many other aspects that can be included in the parameters of an internal credit scoring system. For the merchants, the banks can estimate the turnover value per month to be the basis to calculate the potential loans facility to be offered. The banks can then offer either invoice-based loans (PO based) or regular working capital loans.

For the retail/individual segment, the banks can easily provide pay later payment options for transactions value above IDR1mn, for example. Indeed, the e-commerce platforms already offer this payment term with interest rates ranging from between 1.4%-5.25% per month with a maximum loans size of IDR3bn (refer to Exhibit 2). Currently, the e-commerce players are partnering with fintech multifinance companies and banks for the products. With a relatively small ticket size (max IDR30.0mn) and short-term tenors (less than 12 months), a fast approval and disbursement process are the key factors to beat the pay later competition.

Exhibit 2: Lending products in a few e-commerce platforms

Company Feature name and partners

Maximum ticket size Maximum tenor (months)

Maximum lending rate per month (%)

Tokopedia Paylater (Kredivo) IDR3.0mn (basic)

IDR30.0mn (premium)

1 (basic)

12 (premium)

0 (basic)

2.6 (premium)

Paylater (BRI Ceria) IDR20.0mn 12 1.4

Pinjaman Online (BFIN, Julo Finance, Koinworks, Adira Finane, Tunaiku)

IDR3.0bn 96 Not disclosed

Dana instan (Kredit Pintar, Finmas)

IDR2.4mn 3 5.25

Shopee SpayLater for goods purchase

IDR50.0mn 12 2.95

Spinjam for instant loans IDR9.0mn 12 2.95

Gojek GopayLater (Findaya) IDR3.0mn Not disclosed Fee starts from IDR10,000

GoModal (Findaya) Not disclosed (Merchants) Not disclosed Not disclosed

Source: BRI Danareksa Sekuritas

Exhibit 3: Paylater benefits vs credit cards

Source: Momentum Works

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Exhibit 4: Example of Paylater features in Tokopedia apps

Source: Tokopedia, BRI Danareksa Sekuritas

Exhibit 5: Simulation of instalment using Paylater in Tokopedia apps, base price IDR1.55mn

Source: Tokopedia, BRI Danareksa Sekuritas

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Regulators and sector environment: more supportive Recent new policies to propel more innovations

The regulator, in this case the Financial Services Authority (OJK), fully supports the digital bank

initiatives as they will help its goal to increase financial inclusion in Indonesia. Given the geographic

aspects, we assume that the banks with a strong presence in rural areas are still in a better position

to expand their business. We see that most digital banks will be more focused on the informal

sectors in big cities and the surrounding areas as their main target as most of these people already

own a smartphone and know how to use it. Active users of e-commerce platforms will also be the

low hanging fruit for as their potential borrowers.

Under POJK 12, OJK regulates the minimum core capital of IDR10.0tn for the new banking license.

In addition, OJK also governs the digital banks that are not only full digital banks but also

conventional banks that offer digital products and services. Chapter XIV, meanwhile, emphasises

the banking synergy within the group with subsidiaries of conventional banks, digital banks, sharia

banks, and non-bank financial institutions. More importantly, OJK has also rearranged the

classification based on core capital with KBMI I-IV (refer to exhibits 6). Based on the new capital

category, we believe four big banks remain in a safer position. Nonetheless, we view that smaller

banks will continue to be the M&A targets given their existing banking licenses.

Additionally, OJK through POJK 13 also simplified the permits needed for new banking products and

services particularly for digital initiatives. This is mainly to create a level playing field and a more

adaptive environment given the fluid dynamics, and to help banks better compete against fintech

companies. The new mechanism operates as follows: 1) for the piloting review, OJK will process the

permit in a maximum of 14 working days, 2) permits without a piloting review will be processed by

OJK in a maximum of 14 working days, 3) instant approval whereby if after 10 working days from

the bank submitting complete permits and OJK does not respond, then the bank can offer the new

products and services.

As we can see in exhibit 6, most of the claimed digital banks are still under KBMI I category. To

further expand their businesses in digital banking, these banks are already in the process of seeking

an additional capital injection through rights issues. At the same time, the management team will

continue to expedite the product development that heavily depends on the IT function. This is

because the digital banks will focus on the customers’ experience and the products/services that

are customised to each customers’ needs. One individual might need a loan to buy prepaid

vouchers, while another may want to obtain a short-term loan for bridging the daily cashflow of his

stall selling prepaid vouchers.

Exhibit 6: New OJK policy on core capital category

Category Core capital requirement under BUKU

Core capital requirement under KBMI

Listed banks under new KBMI category

I < IDR1.0tn < IDR6.0tn AGRO, BANK, BBHI, BINA, BEKS, BVIC, BBYB, BNBA, BGTG

II IDR1.0-5.0tn IDR6.0-14.0tn MAYA, BJBR, BJTM, BBKP, SDRA, ARTO, BSIM

III IDR5.0-30.0tn IDR14.0-70.0tn BNLI, PNBN, BNGA, BDMN, NISP, BTPN, BNII, BBTN, MEGA

IV > IDR30.0tn > IDR70.0tn BBCA, BBRI, BMRI, BBNI

Source: OJK, BRI Danareksa Sekuritas

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Collaboration type of partnership

An agile and lean structure with a high dependency on IT (including a proper credit scoring system)

and fast approval process are the key factors for exponential growth in the fintech industry, we

believe. As of September 2021, OJK recorded 107 legal fintech companies, already down from

August 2020’s 157 entities. We believe the prolonged pandemic is one of the reasons for the fewer

number of fintech players in recent months. While asymmetric information between intermediary

lenders and borrowers can be significantly reduced with dynamic data collection and monitoring,

thus reducing the risk for moral hazard.

The key fintech players are namely Investree, Amartha, Uang Teman, Modalku, Indodana, Julo and

Awan Tunai, among others. Please also note that some fintech players have their respective niche

markets aside from consumption-based loans, i.e. TaniFund for agriculture and farmers, Edufund

for education-oriented needs, and Qazwa for sharia-based P2P lending. Nonetheless, we believe

there will be less players within the fintech industry going forward, particularly those which offer a

non-unique value proposition to customers, and have a dull credit scoring system with weak support

from shareholders.

We also see that some multifinance companies are quite aggressive in tapping into the paylater

business, i.e. BFI Finance (BFIN IJ, NOT RATED) and Adira Finance (ADMF IJ, NOT RATED). Both

companies, we believe, aim to diversify their financing portfolios as well as to explore more business

opportunities and to gain more databases for internal credit scoring systems. We assume that

smaller multifinance companies with non-bank shareholders will be in higher risk territory due to

the threat from fintech companies.

We also do not forget that the conventional big banks are also digitalizing their products and

services. These big banks are also digitalizing the back-end business processes mainly to improve

productivity and efficiency aside from generating potentially higher fee-income going forward. It is

worth noting that these banks also have a higher number of customers (retail and institutional)

putting them in a better position to defend their market share in the next few years. Therefore, the

challenges are more towards how to shift the customers’ behaviour to utilize the digital platforms

(mobile and internet banking) from the traditional method, i.e. branch and ATMs. And most of these

banks also have plans to launch a super apps platform in the near term, leading to more options for

customers, particularly tech-savvy ones.

Exhibit 7: The benefits of collaboration between banks and fintech firms

Bank Strengths Fintech Strengths Fintech Differentiation

Broad existing customer base New ideas/thinking Experiences tailored to specific consumer groups

Broad product set Agile implementation Greater flexibility in service approaches

Low cost of capital Cutting edge analytics and data management New business models that change economics

Regulatory protections (deposit guarantee, OJK guarantee, etc)

Online customer acquisition Inclusion and serving underserved customers

Revenue source (for fintech) Online/mobile UX optimized design Shift away from products to differentiated technology experiences

Source: Bank 4.0

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Digital banks: the new universe Hybrid of fintech and conventional bank

We believe that digital banks are purely the well-balanced mix between traditional banks as they

own the banking license and can raise cheap funding, i.e. CASA deposits, and fintech DNA given a

more dynamic culture to accept new ideas which leads to continuous innovations in products and

services. To attract new customers, the digital banks also offer free transfers to other banks and top

up e-wallet fees up to 25 transactions per month, no fees for withdrawals at other banks’ ATMs and

attractive deposits rates.

As currently the digital banks’ lending products are not yet introduced through e-commerce

platforms, we believe the partnership with fintech or multifinance players (most likely sister or

parent company) by providing loans to them is the first phase of growth driver for the digital banks.

IDR600bn loans facility from ARTO to BFIN is one example. This is also because the digital banks are

still in the development process to create the direct-to-customers lending products aside from the

seamless transition of the apps into the respective e-commerce platforms. We expect the digital

banks’ revenue generator (likely to be launched in 4Q21) will be overlap with fintech’s financing

product, the short tenor with small ticket size that mostly dominated by consumer loans.

Exhibit 8: Digital banks comparison

Indicators ARTO AGRO BABP BBYB SEA BANK

Ecosystem Go-To BRI group

BRI Ventures portfolio, i.e. TaniHub, Payfazz, Haus!

MNC Group

P2P players, i.e. Kredit Pintar, Atome, Oriente

Akulaku

Alibaba’s investment portfolio, i.e. Lazada, Bukalapak, DANA

Shopee

Shareholders PT Metamorfosis Ekosistem Indonesia (29.8%)

Gojek (21.4%)

PT Bank Rakyat Indonesia (86.1%)

MNC Capital Indonesia (50.27%)

PT Akulaku Silvrr Indonesia (24.98%)

PT Gozco Capital (17.68%)

PT Danadipa Artha Indonesia (97.25%)

PT Koin Investama Indonesia (2.75%)

Specific target market

Merchants, gojek drivers, individual customers

Informal workers (freelancers, half-employed), merchants, suppliers

MNC Group’s pay TV subscribers, P2P players

Merchants, individual customers

Merchants, individual customers

# of potential users (mn)

11.0mn merchants

2.0mn drivers

100.0mn individual customers

4.5mn informal workers

1.0mn merchants

100k suppliers

715k branchless agents

10.0mn pay TV subscribers

30.5mn Lazada customers

90.0mn Bukalapak customers

93.0mn users

Potential products

Working capital loans for merchants

Multipurpose loans for drivers

Paylater for individual customers

Working capital loans for merchants/suppliers

Multipurpose loans for informal workers

Co-branding credit cards for individual customers

Multipurpose loans for customers of P2P partners





Current features

Deposits: Free transfer/e-wallet top up fee, multiple pockets

Lending: Biometrics recognition for account opening, instant approval

Deposits: fast account opening process with biometrics face recognition

Deposits: free transfer fee

Deposits: free transfer fee, high TD and savings rate (8.0% p.a)

Deposits: free transfer fee, high deposits rate (7.0% p.a.)

Source: Respective company, BRI Danareksa Sekuritas

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More homework to be done

To diversify the loans mix going forward, we believe the digital banks will tap the individual

borrowers as well as the merchant segment, particularly given the c.62.0mn micro and small

business owners in Indonesia (refer to Exhibit 9), the underserved segment that is currently served

by fintech, P2P and multi-finance players. We also notice that the upcoming Ultra Micro holding on

BBRI, Pegadaian and PNM would be the strong contender in this market even though BBRI would

tap more productive loans in the rural areas. Most of the digital banks will mostly concentrate in

the first and second tier cities, depending on the e-commerce ecosystems they attach to.

By utilizing a digital ecosystem, most of the digital banks have emphasised to adopt the supply chain

approach on merchant lending segment (PO-based). By doing so, the digital banks can mitigate

higher NPLs going forward as it is guaranteed by the payment from customers. For the individual

loans, the lending product would usually be short-term and of a small ticket size. Given the short-

term tenors in both segments, the number of potential borrowers and the recurring loans are two

crucial factors to ensure sustainable business growth.

Exhibit 9: Sizeable basis on mass-market segment

Source: BBRI

A proper credit scoring system and fast approval time should be key catalysts in the digital banks’

business model. Some of the key parameters might be different in each respective digital ecosystem,

depending on the sub-segment as well as the regions. For example, F&B merchants should have

different working capital turnover compared to gadgets merchants, while the transactions pattern

of individuals in Jakarta should be different from those in say Samarinda. By gaining a large database

from the digital ecosystem, the banks can then build a reliable credit scoring system and

underwriting process. The lean structure of digital banks, AI, cloud database and a knowledgeable

management team are core values to gain traction in the future.

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Exhibit 10: Some features in digital banks platform

Source: Respective digital bank, BRI Danareksa Sekuritas

On the funding side, most of the digital banks would depend on the stickiness of merchants and

customers in the respective ecosystem as most of them already maintain a certain amount in their

accounts or e-wallets such as GoPay, ShopeePay, Ovo Cash, etc. The e-wallet players have the

flexibility to manage the customers’ floating funds to place in several liquid instruments. However,

customer loyalty continues to be questionable as most of the e-wallet players are still offering

attractive cashbacks.

Going forward, once the lending grows, the banks will need to gradually rearrange the funding

structure more towards cheaper deposits instruments, i.e. CASA deposits. Additionally, most of the

banks would likely cut the superior savings rate to a similar level with other banks’ saving rates

(below 3%) when the banks view that the stickiness of the CASA deposits’ customers are already in

place (beyond 2022F). Yet, some digital banks, such as ARTO and AGRO, are offering non-premium

savings/TD rate to build their CASA deposits. Instead, the easiness and wide range of products

(insurance, e-wallet, mutual funds, prepaid vouchers, etc) would be their value proposition to win

the competition ahead.

From the customers’ perspective, the easy-to-use apps would be another winning point for digital

banks to succeed aside from the partnership with digital ecosystems. Based on our ground checks,

customers can easily open deposits accounts within an hour once the requirements are fulfilled and

the KYC/crosscheck process with the bank’s representative through video call are done. However,

as most of the digital banks have not introduced their direct-to-customers lending products,

execution remains the overhanging issue for digital banks.

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Exhibit 11: E-wallet players in Indonesia

Company General info Shareholders Features Traffic during pandemic

DANA # of users: 70mn

Avg transactions: 6/month

Avg daily downloads: 11 (2020)

PT Elang Sejahtera Mandiri (99%)

Ant Financial Services Grop

Wallet (premium, top up, store debit card, withdrawal, payments), send/request funds via DANA/bank

20.0mn+

OVO # of users: 115mn Avg transactions: 8.6/month Avg daily downloads: 18

Grab (44%)

Tokopedia (41%)

Tokyo Century Corp (7%)

Lippo Group (7%)

OVO Invest, Bill payment & top up prepaid vouchers, top up OVO cash via ATM/m-bankinginternet banking/debit card and selected merchants, donations

New users +267%, online sales +110% from pre-pandemic

Link Aja # of users: 71mn (2021) Avg transactions: 5/month

Telkomsel (27%)

BMRI (17%)

BBRI (14%)

BBNI (14%)

JSMR (10%)

Pay merchants with QRIS and Token, prepaid vouchers on mobile and internet data, send money, top up balance through SOE banks and other banks (ATM Bersama)

71mn+ users, 1.1mn MSMEs

Shopee Pay Avg transactions: 14/month

Indigo Trading -Sitorus Family (51%)

Sea money Ltd (48.89%)

Gang Ye (0.01%)

Top up max IDR2.0mn unverified acct and IDR10mn verified acct, online trx in Shopee apps/merchants, send/withdraw fund to another Shopee acct

Avg monthly trx: 7 (2020)

Total nominal trx: IDR149k/month

Gopay N/A PT Aplikasi Karya Anak Bangksa – Gojek (71%)

Others (29%)

Paylater, Send to another gopay acct, transfer to bank acct, complete payment services (GoCar, GoRide, GoFood, GoSend), bill payment, payment on Gojek partners/merchants

Trx increase 2.7x vs previous year

Source: Various resources, BRI Danareksa Sekuritas

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Financial metrics

Given the rosy outlook in the digital space, we expect the unique strategy of each digital banks

would start to translate to their financial performance. Some digital banks already booked positive

yoy loans growth in June 2021. For customer deposits, we see that few digital banks are obtaining

the support from shareholders and sister companies on the current account and time deposits

instruments. This is reasonable as there is a time lag to translate the funds from the new customers

acquired. Equity, in addition, remains strong post rights issues/capital injection as OJK also requires

digital banks to own minimum core capital.

Exhibit 12: Loans, customer deposits and equity in selective digital banks as of June 2021

Source: respective company, BRI Danareksa Sekuritas

Profits and loss wise, some banks are still posting negative earnings as the lending has not yet

translated to revenues. At the interest expenses line, some digital banks still offer premium rates

despite the current low interest rate environment mainly to entice customers. Hence the NIM

outlook would rely on the bank’s capability to speed up the lending with respective niche market

while reprofile the customer deposits structure to be more dominated by cheap and sticky funding

(CASA deposits).

At the operating expenses level, the banks continue to spend expenses on personnel, IT

development and aggressive marketing gimmicks to acquire new customers (transfer fee, cashback

program, etc). We expect the operating expenses growth to start to normalize in the next few

quarters resulting to lower CIR going forward. While the credit costs would remain manageable if

the bank can continue to improve its credit scoring system, underwriting and monitoring/collecting

process on its loans portfolio. We also assume that the banks would continue to diversify their loans

portfolio among merchants, individual and P2P/multifinance channel mainly to own better risk

management profile. All in, we assume only few banks will start to deliver positive earnings in FY22F.

-

5.000

10.000

15.000

20.000

25.000

ARTO AGRO BABP BBYB SEA Bank

Loans Deposits Equity

IDRbn

12


Exhibit 13: Opex structure in 1H21


Exhibit 14: Net interest income, PPOP and net profit in 1H21


-

20

40

60

80

100

120


Personnel IT Promotions Other G&A

IDRbn

(300)

(200)

(100)

-

100

200

300

400

500


NII PPOP Net profit

IDRbn

Digital banks: Best of both worlds - dmia.danareksaonline.com

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