nume - DBS Bank...underbanked Turning optimistic; three critical factors to watch Auto industry recovery is key growth driver DBS Asian Insights SECTOR BRIEFING 43 04 The auto penetration

DBS Group Research • May 2017DBS Asian Insights43n

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SECTOR BRIEFING

Indonesian Multi-Finance CompaniesBridging Gaps with the Underbanked

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DBS Asian Insights SECTOR BRIEFING 4302

Indonesian Multi-Finance Companies Bridging Gaps with the Underbanked

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Goh Chien Yen Editor-in-ChiefJean Chua Managing EditorGeraldine Tan EditorMartin Tacchi Art Director

Sue Lin LIM Regional Banking and Finance Analyst DBS Group [email protected]

Benedictus Agung SWANDONO Equity Analyst DBS Group [email protected]

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Executive Summary

Opportunities Stemming from the Unbankable Population

Financial Inclusion, a Key to Growth

The Multi-Finance Industry Landscape

Prospects for the Multi-Finance Industry

Key Drivers for the Multi-Finance Industry

Automotive Industry Outlook

Leasing and Heavy Equipment

Key Players and Market Position

4W Market Space

2W Market Space

Regulatory Framework for Multi-Finance Companies

Moving Forward

t 35.9% of the country’s adult population, Indonesia has among the lowest bankable populations in the world. Banking for the unbankable includes instances of micro lending, especially in rural areas. The initiation of the branchless banking agenda has also addressed this to some extent. But

beyond that, the opportunity to further reach out to the unbankable population lies in the hands of the multi-finance companies, which cover both urban and rural areas. The government’s push toward improving financial inclusion opens opportunities for multi-finance companies that are able to meet the financing needs of lower-income households. Multi-finance companies are licensed to offer a range of services, including leasing, consumer financing (the bulk of their business), credit card financing and factoring. But unlike banks, they are not allowed to accept deposits. Like banks, multi-finance companies are governed by Otoritas Jasa Keuangan, the regulatory arm of the Ministry of Finance.

We expect an improvement in financing demand in 2017. The Multi-finance Company Association (Asosiasi Perusahaan Pembiayaan Indonesia) recently announced its forecast of 10% financing growth for 2017 on the back of an improving economy and improved commodity price trends. We identified three critical factors that will drive multi-finance companies’ earnings in 2017: (1) Lower credit cost, (2) higher net interest margin (NIM) and better growth, and (3) well controlled expenses. Note that some multi-finance companies had to accelerate provisions as they had to change how non-performing loans (NPLs) were classified, following stricter regulations to bring streamline NPL recognition in line with that of banks – this caused provisions to be higher in 2016. We expect NIM expansion in 2017 on the back of lower funding cost as the banks have started to price down their loans, which means multi-finance companies now enjoy lower funding costs via bank borrowings (one of the main sources of funding for multi-finance companies). Meanwhile, asset yields are expected to stay constant, as the interest rates offered to customers are not sensitive to changes in the interest rate environment. In addition, operating costs are expected to be flat as the companies have not been aggressive in expanding their service points.

With consumer financing dominating multi-finance companies’ loan portfolios, the auto industry will be the key growth driver. Leasing growth relies mainly on heavy equipment financing, which, in turn, is unfortunately dependent on commodity prices. Both these segments have been in the doldrums in the past two years. The near-term exuberance for commodity prices might not sustain throughout the year but we believe the positive impact should be gradually felt. We expect the auto industry to pick up in 2017, boosting the growth prospects of the multi-finance companies.

Executive Summary

AMulti-finance companies – bridging

gaps with the underbanked

Turning optimistic; three critical factors to

watch

Auto industry recovery is key growth driver


The auto penetration rate in Indonesia remains one of the lowest in the region. In 2015, there were only 13.7m cars and 99m motorcycles on Indonesia’s roads (versus its population of 250m), based on data by the Indonesian Statistics Centre (Badan Pusat Statistik) and the automotive association. The penetration rate for four-wheeler vehicles (4W) is a mere 5%, lower than other developing countries like Malaysia and Thailand. However, two-wheeler vehicles (2W) had much higher penetration at 40% in 2015.

There are a total of 201 multi-finance companies, with the top 20 companies commanding 65% (financing) market share. Each of them caters to its own niche by specialising in several categories such as products financed – 4W, 2W, heavy equipment, etc. – and by geographical reach. Multi-finance companies are typically owned by banks (both domestic and foreign), brand-holding sole agents (Agen Tunggal Pemegang Merek, ATPM) of cars and foreign principals of car makers (e.g. Astra International), and a few are family/individual-owned. The strong multi-finance companies are those affiliated to banks and ATPMs. The largest player, Astra Sedaya Finance, has only 8% market share, placing it marginally higher among the top six multi-finance companies, which indicates how fragmented the industry is.

Compared to banks, multi-finance companies generate better returns. Generally, the major multi-finance players record higher returns on equity and returns on assets as the benefits of higher asset yields outweigh the negatives of higher cost of funds, operating costs, and credit costs. The higher asset yield is due to the ability to tap the unbankable market, an advantage that banks lack. But it requires heavy infrastructure and labour to tap into this market while the elevated credit cost is due to the higher risk profile of customers compared to banks’ customers.

Long-term potential, especially for four-

wheelers

Fragmented industry; obvious market leaders

Top players have better profitability metrics

than banks


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The government’s push toward improving financial inclusion opens opportunities for multi-finance

companies that are able to meet the financing needs of lower-income households


t 35.9% of the country’s adult population, Indonesia has among the lowest bankable populations in the world. Banking for the unbankable includes instances of micro lending, especially in rural areas. The initiation of the branchless banking agenda has also addressed this to some extent. But beyond

that, the ability to further reach out to the unbankable population lies in the hands of the multi-finance companies, which cover both urban and rural areas. The government’s push toward improving financial inclusion opens opportunities for multi-finance companies that are able to meet the financing needs of lower-income households.

Financial Inclusion, a Key to Growth

Indonesia has lagged behind other developing countries in terms of financial inclusion. A 2014 survey conducted by the World Bank indicated that only 36% of the adult population has a formal account in a financial institution. This is lower than the average of East Asia and Pacific countries (69%), the average of lower middle-income countries (42%), and even ASEAN peers such as Thailand (78%). In terms of lending, the statistics are even less encouraging. Only 13% of the adult population borrowed from financial institutions. However, it is quite surprising that 42% of these people prefer to borrow money from family or friends. This indicates that there are plenty of untapped markets for lending in Indonesia. Poor infrastructure and education are a few reasons why these markets remain isolated from the modern banking world.

The state of financial inclusion in Indonesia

Diagram 1. Indonesia: Banking penetration rate

*The numbers are as percentage of adult population (age 15+)Source: Little Data Book on Financial Inclusion 2015, DBS Bank

Opportunities Stemming from the Unbankable Population

A


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Who are the unbankable?

Diagram 2. Indonesia: Many are excluded from the financial system

Diagram 3. Indonesia: Geographical and economic mapping

*The numbers are as percentage of adult population (age 15+)Source: Little Data Book on Financial Inclusion 2015, DBS Bank

* Banking penetration defined as percentage of respondents reported to have an account at a financial institutionNote: BRI – Bank Rakyat Indonesia (Indonesia People’s Bank), BPR – Bank Perkreditan Rakyat (People’s Credit Bank/rural banks),

BKD – Badan Kredit Desa (Village Credit Board), LKBD – Lembaga Keuangan Bukan Bank (Non-bank Financial Fund)Source: KPMG

Reaching out to the unbankable has become a challenge, mainly due to Indonesia’s unique geographical features and underdeveloped infrastructure. Furthermore, the potential business in these areas is too small for financial institutions to justify setting up branches. The operating cost of reaching out to rural areas has outweighed the benefits due to the small-scale nature of such operations.


Multi-finance companies should be seen as capillaries of the financial system, allowing it to channel a stream of funds to the unbankable space in more remote areas. Their operations should not be viewed as “shadow banking” as their existence fits well with the regulators’ intention to improve financial inclusion in the country. Since 2014, the government has allowed multi-finance companies to disburse multi-purpose financing, which provides a simple and fast underwriting process. As an anecdotal example, BFI Finance (BFIN) can underwrite multi-purpose financing over one to two days. A looser regulatory environment has enabled multi-finance companies to be more flexible.

On the flipside, multi-finance companies are not allowed to gather deposits from customers and tend to draw funding from banks, either through bank borrowings, joint financing or channelling. They can also issue bonds to gather larger chunks of financing.

Consumer financing customers are mostly in the lower-income bracket and deemed unbankable by larger banks. These consumers may not have sufficient collateral, may work in the informal sector, and may not have verifiable credit history. Some do not have the proper documentation needed to apply for a bank loan, such as a tax identification card. The implied higher risk also means multi-finance companies are able to charge higher rates than banks. The cost is also higher as multi-finance companies typically need a larger network to remain close to their customer base. The business is also fairly labour-intensive, especially for collections and sales.

Multi-finance companies are crucial proxies for

financial inclusion

Multi-finance companies’ customers are not typical

banking customers

Note: <US$1.9 a day = 96m people; US$1.9 to US$4.5 = 107m people Source: World Bank, KPMG, DBS Bank

Diagram 4. Indonesia: Economic pyramid

Lower-income customers are not sensitive to interest rates charged on their loans as long as they can cope with the monthly instalments. They prefer financing companies that provide fast approval and easy service.

Currently, consumer financing dominates around 70% of the total loan portfolio of multi-finance companies, and this mainly consists of auto-related financing. However, as the market for automotive financing becomes more saturated, we should see other forms of financing such as multi-purpose financing, refinancing and also infrastructure loans gathering growth pace. Furthermore, the government has allowed multi-finance companies to participate in disbursing subsidised micro loans (Kredit Usaha Rakyat).

The Multi-Finance Industry Landscape

There were 201 financing companies in operation in 2016. Over the past 10 years, several had their licenses revoked due to non-compliance with regulations, the most common issue being inadequate capital. Prior to the Asian financial crisis, there were over 212 multi-finance companies nationwide. They typically provide financing for consumption needs (vehicle financing), leasing, factoring and credit cards. Currently, the majority of multi-finance companies focus on consumer financing – new and used motorcycles (two-wheelers, 2W) and cars (four-wheelers, 4W) – and leasing. Factoring remains a small part of the industry. Credit cards are no longer a feature of multi-finance companies and it has become the target segment of banks. However, we noted that a handful of multi-finance companies are getting back into the game. New multi-finance company licences are still available. Last year, PT Group Lease Finance Indonesia, a joint venture between PT J Trust bank and Group Lease PLC in Thailand, was granted a licence.


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Service over pricing

Auto-related loans currently dominate financing segments

A fragmented industry

Note: OJK changed the classification for financing activities from September 2016 – from “by type” to “by purpose”Source OJK, BI, DBS Bank

Diagram 5. Multi-finance companies: Financing activities (August 2016)


We note that OJK changed the classification for financing activities from September 2016. Rather than “by type”, the classification is now “by purpose” – investment, working capital and multi-purpose loans – which is more in line with banks’ classification. For example, passenger 2W and 4W (for personal use) financing is included under “multi-purpose loans”. Commercial automotive financing with tenors of less than two years is considered “working capital financing”, while tenors of more than two years fall into “investments financing”.

Despite growing at a faster rate compared to the banks, financing growth has moderated in the past five years. There has been a confluence of factors contributing to the moderating growth, the main one being the steep fall in commodity prices, as well as regulatory changes. After the relaxation of the minimum down payment regulation in June 2015 (see details in Diagram 53), automotive sales growth started to pick up and swing into positive territory. We noted, however, that 4W sales recovered faster compared to 2W sales. We believe that the low commodity price environment was more detrimental to the purchasing power of ex-Java buyers who usually rely on 2W transport. Sales of 4W vehicles, on the other hand, are more related to economic activity in major cities and urbanised areas, which experienced less impact from softer commodity prices.

Change of financing classification by OJK from

September 2016

Overall growth has moderated since 2011

Diagram 6. Multi-finance companies: Financing activities (February 2017)

Note: OJK changed the classification for financing activities from September 2016 – from “by type” to “by purpose”Source: OJK, BI, DBS Bank

Source: Bloomberg Finance L.P., Gaikindo, AISI


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Diagram 7. Multi-finance companies: Automotive sales versus crude palm oil price

Diagram 8. Multi-finance companies: Financing activities year-on-year growth

Diagram 9. Auto: Volume sales improvement after down payment rule relaxation

Source: OJK, BI, DBS Bank

Source: Gaikindo, AISI, DBS Bank

bn


Automotive sales growth is the main driver for financing. Based on checks with industry players, about 70-75% of auto sales use financing. The leasing business is also dominant and it usually involves support financing for heavy equipment (HE) or machinery sales.

Leasing business’ contribution to total financing shrank to 27% in August 2016 from 34% in 2013. The weakness in this segment is mainly caused by sluggish HE sales. Softer commodity prices, especially in the coal and crude palm oil (CPO) sectors, also dragged down overall HE sales and, consequently, credit demand from the segment. Furthermore, the leasing of machineries also contracted as some small- to medium-sized enterprises preferred to halt their expansion plans until the economy starts to pick up.

Source: Bloomberg Finance L.P., OJK

Source: Bloomberg Finance L.P., OJK

Diagram 10. Multi-finance companies: Financing correlation with CPO price

Diagram 11. Multi-finance companies: Financing correlation with coal price

Industry remains dominated by automotive

financing activities

Leasing business is sensitive to commodity

prices

Factoring is a form of short-term financing, typically involving tenors of less than one year. Clipan Finance Indonesia (CFIN), one of the listed companies under our coverage, has a sizeable factoring business with around 11% market share in 9M16. CFIN ramped up its factoring business in 2012 to channel its liquid assets as its leasing and consumer financing businesses were slowing. Factoring yields are similar to leasing, at 15-17%, and are fully collateralised by land and buildings.

Bank borrowings have been the preferred choice of funding for multi-finance companies, contributing up to 77% of total funding. However, bonds issuances have been robust in the past year. Note that only sizeable and credibly rated multi-finance companies have access to such funding opportunities. The industry’s gearing ratio is at 8.2 times, which is still below the maximum gearing ratio of 10 times under OJK’s regulation.


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Source: OJK

All are non-listed companies except Wahana Ottomitra Multiartha, Adira Dinamika Multi

Finance, BFI Finance Indonesia, and CFIN. Data as of 2015 is more complete and gearing ratio has

not moved much since then

Source: BI, Infobank

Diagram 12. Multi-finance companies: Funding composition (February 2017)

Diagram 13. Multi-finance companies: Gearing ratio (2015)

Factoring business is small

Bank borrowings remain main funding source

More multi-finance companies have been trying to tap into cheaper financing by issuing bonds in the past few years. Currently, bond financing contributes up to 22% of total financing (versus 11% in 2010). Some companies are also trying to tap into overseas bond markets to find cheaper financing. However, foreign currency bonds have lost their charm recently due to high hedging costs (OJK requires all foreign currency liabilities to be fully hedged), following the IDR’s volatility in the past few years.

Joint financing or channelling schemes with banks are alternative sources of funding for multi-finance companies. Under joint financing, both the multi-finance company and bank “jointly” contribute funds to the arrangement. The proportion contributed by each party differs between agreements, and risks and returns are shared in the same proportion. Under channelling, full funding originates from the bank. The bank bears all the risks, while multi-finance companies receive a fee for managing the financing contracts for banks. As of February 2017, joint financing agreements reached IDR131t, while channelling was at only IDR10t. It is a win-win situation for both parties; banks have access to a higher yielding asset, and financing companies receive funding to grow their asset base.

Joint financing is more popular than channelling, respectively contributing 25% and 2% to total managed receivables (on- and off-balance-sheet receivables) in February 2017. Banks prefer joint financing to channelling – given that multi-finance companies share the risk of delinquent loans, banks can expect better quality credit than if these companies merely acted as an agent under the channelling scheme.


Source: OJK, DBS Bank

Bond funding is gaining popularity

Joint financing and channelling schemes

Preference for joint financing option

Diagram 14. Multi-finance companies: Bond contribution to total financing

Higher returns are mainly driven by higher net interest margins (NIM), thanks to lofty asset yields. A multi-finance company can charge effective yields of up to 40%. However, the higher margin is usually associated with higher operating costs. This is understandable because multi-finance companies typically operate in rural areas to reach untapped markets. This requires more personnel and branches (usually to conduct physical checks of collateralised assets and repossessed assets). Multi-finance companies also face slightly higher credit costs since their customers carry higher risks than banks’ customers.


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Note: The latest data available is as at August 2016; subsequently reclassifiedSource: OJK, BI, DBS Bank

Chunky net interest margins, thanks to lofty

asset yields

Diagram 15. Multi-finance companies: Joint finance and channelling

Diagram 16. Multi-finance companies: Asset yield (August 2016)


Lending rates for multi-finance companies are not sensitive to policy changes. We have seen Bank Indonesia (BI) cut rates by 150 basis points since the beginning of 2016 but the asset yields of multi-finance companies have stayed relatively unchanged.

Multi-finance companies have been plagued with asset-quality deterioration during the economic downcycle, bringing the non-performing loan (NPL) ratio to a high of 2.2% in August 2016, from 1.45% in December 2015. In September 2016, OJK changed its NPL recognition category to be more similar with that of the banks, with five categories from three categories previously. The reclassification saw the NPL ratio starting from a high of 3.4% in September 2016. However, it had moderated to 3.0% by end-February 2017. Moreover, we also witnessed a spike in credit costs, which reached 2.51% in August 2016, ending the year at 2.88%, versus 2.36% in December 2015.

Sticky pricing

Asset quality issues to be monitored; mostly

regulatory driven


*OJK reclassified the NPL ratio for multi-finance companies to be more similar with that for banks in September 2016. The reporting adjustment resulted in a spike in the NPL ratio


Diagram 17. Multi-finance companies: Asset yield versus 12-month BI Certificates (SBI) Rate

Diagram 18. Multi-finance companies: NPL ratio

Prospects for the Multi-Finance Industry

We expect an improvement in financing demand this year. The Multi-finance Company Association (Asosiasi Perusahaan Pembiayaan Indonesia) recently announced its forecast of 10% financing growth this year on the back of an improving economy and higher commodity prices. However, we believe this is an optimistic number as the sustained positive growth needs to be supported by real improvements in purchasing power and business confidence, which we have yet to see.


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Turning optimistic

Note: Red considered NPLSource: OJK, DBS Bank


Diagram 19. Multi-finance companies: Changes in NPL recognition

Diagram 20. Multi-finance companies: Credit cost

Overdue 3 categories before Sep 2016

5 categories after Sep 2016

On time payment Current Current

90 days in arrears Special Mention

90-120 days in arrears Substandard

120-180 days in arrears Doubtful Doubtful

More than 180 days in arrears Loss Loss


We believe earnings should recover in 2017 on the back of lower credit costs due to improved commodity prices, which can help boost purchasing power, especially in the lower-income segment. We do not expect much deviation on NIM due to the stable yields and costs of funds of the multi-finance companies. Operating costs are also expected to be flat as the companies have not been aggressive in expanding their service points.

Earnings growth traction should improve

from here

Source: OJK, BPS, DBS Bank

*Average earnings growth of BFIN and CFIN Source: OJK, Companies, DBS Bank

Diagram 21. Multi-finance companies: Financing growth versus GDP growth

Diagram 22. Multi-finance companies: Earnings growth

We expect NIM expansion on the back of lower funding costs as banks have started to price down their loans, which means multi-finance companies now enjoy lower funding costs via bank borrowings. Meanwhile, asset yields are expected to be constant as the interest rates offered to customers are not sensitive to changes in the interest rate environment. Multi-finance customers are typically more concerned about monthly instalments (whether they are able to pay), fast approval and easy service than they are about interest rates. The higher reliance on bond financing could lower funding costs. Bond financing has been gaining popularity and the data show that the bond financing portion is on the uptrend. This might lower the blended cost of funds further as bond financing is typically cheaper than bank financing.

Historically, the cost-to-income ratio was stable around 40%. The slight uptick in 2015 was mainly due to weakening profitability – largely attributed to the slowdown in the automotive business and heavy equipment. A slight improvement in 2016 was triggered by some cost efficiency measures. We noted that Adira Dinamika Multi Finance (ADMF) and Mandiri Tunas Finance (MTF) successfully improved their cost-to-income ratio in 2016 through network and employee rationalisation.


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Potential NIM expansion

Operating expenses should remain in check

Source: Companies, DBS Bank

Diagram 23. Multi-finance companies: NIM

Multi-finance companies reported lower NPL ratios in 2016. However, the multi-finance companies we met were hesitant to turn bullish. Better commodity price would be positive for their customers, especially for commercial heavy equipment leasing and factoring but these customers need a sustained high commodity price to help their distressed cash flow. However, we believe that positive asset-quality trends may come from the portfolio shift toward customer financing and tighter financing approval.


Diagram 24. Multi-finance companies: Cost-to-income ratio

Diagram 25. Multi-finance companies: NPL ratio



Improvement in asset quality


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ith consumer financing dominating the loan portfolio of multi-finance companies, the auto industry will be the key growth driver. Leasing growth relies mainly on heavy equipment financing which, in turn, is unfortunately dependent on commodity prices. Both these segments have been in the

doldrums in the past two years. The near-term exuberance of commodity prices might not sustain throughout the year but we believe the positive impact will be moderate. We expect the auto industry to pick up slightly this year, boosting the growth prospects of multi-finance companies.

Automotive Industry Outlook

Industry sales came in slightly lower than our expectation in 2016, with FY16 volume growing 4.8% on-year (we forecasted 5% on-year). Meanwhile, 2W demand is still weak as FY16 sales volume shrank 8%, mainly driven by weak ex-Java sales due to sustained low commodity prices. We are less optimistic about the 2W segment and expect only 2% volume growth in FY17. Astra International’s management has guided that sales in FY17 will be second half-heavy while the first half of the year should see flat volume growth.

Sustained high CPO prices should help automotive sales, especially in the ex-Java areas. However, purchasing power in the commodity-related regions has yet to show significant improvement. We believe high commodity prices need to be sustained long enough to allow the positive effects to spill over to the auto sector. Therefore, we only expect modest growth (around 5% for 4W and around 2% for 2W) this year.

The auto penetration rate in Indonesia remains one of the lowest in the region. Based on data from BPS and the automotive association, there were only 13.7m cars and 99m motorcycles on Indonesian roads in 2015 (versus the population size of 250m). The penetration rate for 4W is a mere 5%, lower than other developing countries like Malaysia and Thailand. However, 2W penetration was much higher at 40% in 2015.

Improved auto sector outlook for 2017; expect a stronger

second half

Temporary support from commodity prices

Long-term potential is still there, especially for

4W

Key Drivers for the Multi-Finance Industry

W


Source: CEIC, BPS, Gaikindo, DBS Bank

Source: Gaikindo, DBS Bank

Source: AISI, DBS Bank

Diagram 26. Auto penetration in developing countries

Diagram 27. Auto: 4W sales trend


Car ownership ratio


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Despite the appeal of a low 4W penetration rate in Indonesia, we argue that only around half of the Indonesian population can afford a car. Income equality has become a key feature in the Indonesian economy. This can be seen in the increase in the Gini coefficient to 0.4 in 2016 versus 0.36 in 1996. Data from BPS indicates that the top 20% of the Indonesian population contributes to 48% of total expenditure, as shown in the chart below.

Source: BPS 2014, DBS Bank

Note: Calculated as number of vehicles divided by national populationSource: BPS, Gaikindo, AISI, DBS Bank


Diagram 29. Indonesia: Inequality is an important feature

Diagram 30. Indonesia: Auto loan penetration


Penetration is low, but is it that low? Only half the population can buy

a car

We estimated the car price an average Indonesian can afford in each segment. Using nominal GDP per capita as a proxy of income, we estimated that the top 20% of the working population (aged 15-64) has an average annual income of IDR176m per year. Assuming 30% of the income is allocated to car instalments, a dual income, 25% down payment, and four-year instalment period, we believe that families in this class can afford a IDR350m car.

The affordability analysis might explain why small multi-purpose vehicles (MPV) – Avanza, Xenia, Mobilio and Ertiga – have become the favourite cars in Indonesia. The prices of those cars fall in the income range of the top 20% and middle 40% segments. Some brands, like Innova, have also moved up to the higher-end target market segments to capture more affluent customers.


Diagram 31. Auto: Price segmentation based on income

Diagram 32. Auto: Price and units sold by top 10 brands in 2016

* Productive age (age 15-64) is 66.9% of total population, based on World Bank data in 2014**Assuming dual income and instalment is maximum 30% of monthly income. Calculated as: annual GDP per capita* 2 * 30% / 12

*** Ideal price segment is based on credit simulation on Astra Credit Companies website assuming 25% down payment and four years tenor Source: BPS; Gaikindo; AISI; DBS Bank


Affordability estimates

Small multi-purpose vehicles are favourite

cars

Income Brackets Population (mn persons)*

Annual GDP Nominal 2016 (Rp tr)

Annual GDP per Capita (Rp mn)

Capability of monthly instalment per family (Rp mn)**

Ideal Price Segment (Rp mn)***

Top 20% 34,046 5,988 176 8.8 350

Middle 40% 68,092 4,292 63 3.2 130

Bottom 40% 68,092 2,134 31 1.6 60

Total 170,230 12,415 73 3.6


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We believe the middle 40% of the market offers the biggest potential due to its huge population. Based on the assumption we have laid out earlier, people in this segment can afford cars with price tags of around IDR125m. This might be suitable for low-cost green cars (LCGC), which are usually priced around IDR100m-150m per unit. This segment has barely been penetrated. LCGC sales have not even reached 1m units versus the potential market of 51m units (assuming 102m people in the middle segment use one car per two persons).

LCGC car volume saw a significant increase in market share, especially during the economic slowdown in 2015. The market share of LCGCs swelled to 22% in 2016 from 14% in 2014. The strong penetration rate is due to LCGC’s value proposition, which is well accepted by the price sensitive lower-income consuming class. LCGCs also offer better fuel efficiency; and can carry five to seven passengers, which is a strong selling point for young families in Indonesia.

Diagram 33. Auto: Market size for each segment

Diagram 34. Auto: LCGCs are gaining market share

Note: Number of families is calculated as working population (age 15-64) divided by twoSource: BPS, Gaikindo, DBS Bank


Low-cost green cars segment has the lowest penetrated market and

strong growth ability

LCGCs are gaining market share


Leasing and Heavy Equipment

Leasing shrank by 12% in August 2016, the weakest growth since the global financial crisis. Low commodity prices, such as for coal and CPO, hit the demand for new HE, resulting in a 44% contraction in annual sales volume for Komatsu HE (the market leader in Indonesia). Furthermore, the soft economic conditions also dragged down sales of trucks and machinery, which eventually translates into low leasing demand. The leasing business is more cyclical by nature compared to consumer financing.

Our coal price assumption for FY17 onwards is at US$65 per tonne, supported by supply and demand rebalancing following China’s intention to limit its coal production volume as well as the stickier-than-expected Chinese coal demand in the short- to medium-term. Besides the China coal production cut, coal restocking for the 4Q16 winter season provided a short-term cushion for coal prices.

While the coal price benchmark rose by more than 25% in the 2016 second half, we believe it was more due to supply disruption rather than demand improvement. We have not seen any structural improvement in demand from key importers like China, beyond the upcoming capacity under construction. Beyond 2016, we believe the supply and demand situation is improving, even though a structural supply and demand recovery is not in sight yet. The higher coal price trend of late is not expected to translate into a full-fledged coal price recovery cycle.

Diagram 35. Newcastle coal price trend and forecast (US$/tonne)

Source: Bloomberg Finance L.P., DBS Bank

Sluggish leasing growth in 2016

Moderately higher coal prices in 2017

A recovery is in sight, but we are not overly

bullish on the coal price outlook

The leasing business is highly dependent on HE volume, which in turn depends on commodity prices. We expect the improvement in HE sales to come from higher demand from the mining and construction sectors. With a recovery in commodity prices, we should at least expect the leasing business of the multi-finance companies to stop sliding.


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Diagram 36. Leasing: Hampered by low commodity prices

Note: HE sales as of 3Q16; the latest data available is as at August 2016; subsequently reclassifiedSource: Companies, OJK, DBS Bank

Demand for HE leasing should recover


ho’s who in the Indonesian multi-finance industry? The industry is very fragmented. As mentioned above, there are a total of 201 multi-finance companies, with the top 20 companies commanding 65% (financing) market share. As we profile all the multi-finance companies in the industry

by business type and ownership, we will focus on the top companies to analyse their strategies and profitability. We will also narrow our analysis on the multi-finance companies by focusing on consumer financing, which forms the bulk of their business.

The industry is fragmented and each company caters to its own niche. The top 20 multi-finance companies have a combined market share of 65%. Each of them caters to its own niche by specialising in several categories such as product finance (4W, 2W, HE, etc.) and geographical reach. The biggest player, ASDF, only has 8% market share, marginally higher among the top four companies. Some multi-finance companies invest in a huge branch network, such as BFIN (204 branches) and ADMF (201), for local presence and to gain local knowledge in specific geographical areas.

Multi-finance companies are typically owned by banks (both domestic and foreign), brand-holding sole agents (ATPM) of cars and foreign principals of car makers (e.g. Astra), and a few are family/individual-owned. The strong multi-finance companies are those affiliated to banks or car makers and ATPMs. ATPMs seek to team up with multi-finance companies to support their sales. Some ATPMs have their own financing companies. The Astra Group, which is the ATPM for Toyota, Daihatsu and Isuzu cars and Honda motorcycles, has Astra Sedaya Finance, Toyota Astra Finance for 4W financing and Federal International Finance for 2W financing. The Indomobil Group also has its own financing firms – Indomobil Finance Indonesia for 4W financing and Suzuki Finance Indonesia for 2W financing.

Fragmented market

Synergy with banks and automotive players

Key Players and Market Position

W


29

Diagram 37. Multi-finance companies: Market share of top 20 players

Diagram 38. Multi-finance companies: Breakdown by business type

Note: Based on outstanding balance sheet net receivable; data represent 2015 numbersSource: Infobank, OJK, DBS Bank

Note: Others include leasing, factoring, and multi-purpose financing; data represent 2015 numbersSource: Company annual reports and websites, DBS Bank


Compared to banks, multi-finance companies generate better returns. Generally, the major multi-finance players record higher returns on equity (ROE) and returns on assets (ROA), as the benefits of higher asset yield outweigh the negatives of the higher cost of funds, operating cost and credit cost. The higher asset yield is due to the ability to tap the unbankable market, an advantage that banks lack. But it requires vast infrastructure to tap into this market, while the high credit cost is due to the high risk profile of customers.

Diagram 39. Multi-finance companies: Breakdown by ownership

Diagram 40. Multi-finance companies versus banks: ROE

Source: DBS Bank

Note: Data represent 2015 numbersSource: Infobank, OJK, BI, DBS Bank

Top players have better profitability metrics

than banks

Multi-finance companies, especially those related to banks, often use joint financing to enhance returns and therefore ROE. That explains why BCA Finance (BCAF), MTF and ADMF can offer lower effective loan rates for their products but can still enjoy astronomical asset yields and ROEs. This is the key benefit of having a bank as a shareholder; as the multi-finance company can use the bank’s balance sheet to grow more aggressively and achieve a higher ROE. Automotive-related companies also can use joint financing/channelling but the portion is usually smaller. For example, take ASDF – comparatively, it does not have a significant joint financing portion for its managed receivables and has a relatively low asset yield and ROE.


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Diagram 41. Multi-finance companies versus banks: ROA

Diagram 42. Multi-finance companies in comparison with banks

Notes: Data represent 2015 numbersSource: Infobank, OJK, BI, DBS Bank

(All ratios use an average three years of data for the banks and multi-finance companies covered in this report)Note: Data represent 2016 numbers


Leveraging on banks’ balance sheets through

joint financing to enhance ROE

Multi-finance Companies Banks

NIM 12.90% 7.14%

Credit Cost 2.89% 1.64%

Opex/loan 8.00% 3.60%

NPL 1.11% 2.18%


Diagram 43. Multi-finance companies: Top 20 players (by asset size) – 2015

Company Asset 2015 (Rp bn)

Financing 2015 (Rp bn)

Liabilities 2015

(Rp bn)

Equity 2015 (Rp bn)

Gearing Ratio

Major Product Financed

ROE Number of

Branches

Astra Sedaya Finance

30,392 27,542 24,699 5,693 4.34 4W% 18.10% 61

Central Java Power

29,880 24,425 24,088 5,792 4.31 Power Plant 25.30% N/A

Federal International Finance

28,734 25,962 23,011 5,723 4.02 2W% 29.20% 169

Adira Dinamika Multi Finance

27,744 24,919 23,383 4,361 5.36 4W, 2W 15.80% 654

Oto Multiartha 22,288 19,717 17,301 4,986 3.25 4W 8.30% 72

Toyota Astra Financial Services

17,804 15,986 15,548 2,256 7.17 4W 15.10% 27

Dipo Star Finance

14,304 11,967 12,087 2,216 4.74 4W 20.90% 31

BFI Finance Indonesia

11,770 9,898 7,751 4,019 1.93 Multipurpose 17.00% 204

Summit Oto Finance

10,575 9,120 6,655 3,920 1.73 2W 6.10% 133

Mandiri Tunas Finance

9,203 8,482 8,030 1,173 6.55 4W 29.60% 88

Indomobil Finance Indonesia

8,913 8,085 7,597 1,316 4.9 4W, 2W 6.40% 80

Bussan Auto Finance

8,880 7,566 7,276 1,604 5.07 4W, 2W 0.20% 188

BCA Finance 6,824 5,707 4,634 2,190 2.12 4W 56.20% 60

Orix Indonesia Finance

6,727 4,950 4,533 2,194 2.11 4W, 2W, HE 9.90% 10

Surya Artha Nusantara Finance

6,693 5,260 5,285 1,408 3.66 HE 7.90% 15

Clipan Finance 6,647 6,430 3,048 3,599 0.85 4W 8.40% 45

CIMB Niaga Auto Finance

6,438 5,903 5,459 979 5.73 4W, 2W, HE 8.60% 68

Mitsui Leasing Capital Indonesia

5,910 5,638 4,860 1,051 4.78 4W, HE 7.00% 15

Wahana Ottomitra Multiartha

5,306 4,190 4,451 856 6.02 2W 2.20% 99

Mitra Pinasthika Mustika Finance

5,240 4,671 3,548 1,692 2.19 4W, 2W, HE 1.30% 91



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Diagram 44. Multi-finance companies: Top 2 shareholders of the top 20 players

Company Shareholder 1 Shareholder 2

Astra Sedaya Finance

PT Astra International 75% PT Bank Permata Tbk.25%

Central Java Power

Summit Power Capital Limited (UK) 50%

Summit Power Global Management I B.V (Netherlands) 25%

Federal International Finance

PT Astra International, Tbk. 99.99% PT Asrya Kharisma 0.01%

Adira Dinamika Multi Finance

PT Bank Danamon Indonesia 75.00%

Mega Value Profit Limited 17.42%

Oto Multiartha Sumitomo Corporation 85% PT Sumitomo Indonesia 10%

Toyota Astra Financial Services

PT Astra International 50%; Toyota Financial Services Corporation 50%

Dipo Star Finance

MC Automobile Holding Asia B.V. 85%

PT MC Auto Consulting Indonesia 10%

BFI Finance Indonesia

Trinugraha Capital & Co SCA 44.10%

Lainnya 55.90%

Summit Oto Finance

Sumitomo Corporation 85.00% PT Sumitomo Indonesia 10.00%


Bank Mandiri 51% PT Tunas Mobilindo Parama 49%

Indomobil Finance Indonesia

PT Indomobil Sukses International, Tbk. 99.875%

PT IMG Sejahtera Langgeng 0.125%

Bussan Auto Finance

Mitsui & Co., Ltd Japan 58.33% Yamaha Motor Co.,Ltd Japan 17.67%

BCA Finance PT Bank Central Asia Tbk. 99.58% PT Bank Central Asia Tbk. 99.58%

Orix Indonesia Finance

Orix Corporation 96.02% Yayasan Kesejahteraan Karyawan BI 3.98%

Surya Artha Nusantara Finance

PT Sedaya Multi Investama 60% Marubeni Corporation, Jepang 35%

Clipan FinancePT Bank Pan Indonesia, Tbk.

54.35% Public 45.65%

CIMB Niaga Auto Finance

PT Bank CIMB Niaga Tbk. 99.94 -

Mitsui Leasing Capital Indonesia

JA Mitsui Leasing, Ltd. 85% PT Matahari Artha Nusantara 15%

Wahana Ottomitra Multiartha Tbk

PT Bank Internasional Indonesia 62.00%

PT Wahana Makmur Sejati 17.59%

Mitra Pinasthika Mustika Finance

PT Mitra Pinasthika Mustika Tbk 59.99%

JACCS Co, Ltd 40.00%


Joint-financing & Channelling

Portion*

Joint-financing Partner Joint-financing

Facility Amount (bn)

Joint-financing Portion

Agreement

Effective Interest Rate Offered

Yield on Consumer Financing

FY16

ROA FY16 (%)

BCA Finance

79% Bank BCA n.a 95% 7% - 27% 35% 14%


64% Bank Mandiri 20,500 99%14,1%- 4W21.8% 2W

15.5% - Others20% 2.90%

FIF 16%

TAFS Unlimited 70%-99%

25.1% - 42.6% 28% 6.10%

PT Bank Permata Tbk 6,100 90%-99%

PT Bank Permata Tbk - Syariah

3,000 90%-99%

PT Bank Commonwealth 3,000 70%-99%

PT Bank CIMB Niaga 2,500 70%-99%

PT Bank CIMB Niaga - Syariah

3,000 90%-99%

PT Surya Artha Nusantara Finance

2,000 70%-99%

PT Bank Sahabat Keluarga 1,000 70%-99%

PT Astra Sedaya Finance 300 70%-99%

PT Bank Panin Syariah 500 90%-99%

ASDF 22%

PT Bank Permata Tbk 10,700 90%

7.1% - 29.6% 16% 3%

PT Bank Commonwealth 2,000 90%

PT Sahabat Finansial Keluarga

1,000 90%

PT Bank CIMB Niaga Tbk 1,000 90%

PT Bank OCBC NISP Tbk 500 90%

ADMF 40%PT Bank Danamon n.a 99% 17%-22% - 4W

24% 3.70%PT Bank Commonwealth n.a 99% 33% - 41% - 2W

BFIN 18%

PT Bank Rakyat Indonesia 600 Channeling 16% – 21%- 4W

21% 6.30%PT Bank Mandiri Tbk 500 95% 38%-41% - 2W

PT Bank Maybank Indonesia Tbk

0.5 95% 14%-18% - Prop.

CFIN 3% PT Bank Pan Indonesia Tbk 2,000 Channeling 17.20% 16% 3.10%


4W Market Space

We note that the top six players that dominate this segment have 77% of the estimated new 4W financing market in terms of units financed. ASDF is the market leader in this segment,

Diagram 45. Multi-finance companies: Joint-financing arrangements

* Percentage of managed receivables, gross of unearned interestSource: Annual reports, DBS Bank

Dominated by ASDF and bank-backed parentage


35

thanks to the backing of its automotive distributor and parent bank, Bank Permata. In terms of nominal value of new financing, however, BCAF is the market leader with IDR30.7t new bookings in FY16 (including joint financing), thanks to its strong consumer banking franchise, which enables it to tap into customers in the affluent class segment.

Diagram 46. Top 4W players: Market share in terms of units financed

Diagram 47. Top 4W players: New bookings for new 4W in 2016

Assuming 70% of new 4W domestic sales are using financing Source: Companies, DBS Bank

*Data for Oto Multiarta (OTO M) is a management target in 2016 ** Data for BCAF is an estimation based on disclosed market share



2W Market Space

We see three dominant players in the new 2W financing segment – led by Federal International Finance (FIF), ADMF, and WOM Finance (WOMF). In the past five years, we note that FIF has consistently been increasing market share, supported by Honda’s strong performance. We understand that nearly half of Honda’s sales are financed through FIF. Honda saw its market share rise gradually to 74% in FY16 from 58% five years ago – this has been the main driver for FIF’s strong performance.

Diagram 48. Top 4W players: Market share movement

Diagram 49. Top 2W players: Market share movement


Notes: Assuming 70% of new 2W sales are using financing. WOMF number for 2016 using annualised 9M16 number.Source: Companies, DBS Bank

2W market dominated by Federal International

Finance and ADMF


37

Diagram 50. Top 2W players: Market share in 2016

Diagram 51. Top 2W players: Market share of 2W brands

Notes: Assuming 70% of new 2W sales are using financing. WOMF number for 2016 using annualised 9M16 number.


Source: Gaikindo

The top six players that dominate the 4W financing market segment have 77% market share, in terms of

units financed


ulti-finance companies are licensed to offer a range of services, including leasing, consumer financing, credit card financing and factoring. These companies target the financing needs of lower-income households. But, unlike banks, they are not allowed to accept deposits. Similar to banks, multi-finance companies are

governed by OJK, the regulatory arm of the Ministry of Finance. Prior to the formation of OJK in 2011, multi-finance companies were under the purview of Bapepam (Indonesian Capital Market and Financial Institution Supervisory Agency).

OJK issued regulation 28/POJK.05/2014 governing the licensing and the institution of multi-finance companies. The main takeaways from the regulation include:

Steps to incorporate a multi-finance company:

• Establishment of Limited Liability Company. A limited liability company is the most common legal entity for a multi-finance company in Indonesia. For further details on establishing a limited liability company, please refer to the Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal) website http://www.bkpm.go.id/en/investment-procedures

• Obtain licence from OJK. The directors need to obtain a licence from OJK. The proposal needs to follow the correct format and have attached all the documents required in accordance with 28/POJK.05/2014.

• Fit and proper test for the directors and commissioners.

• OJK will decide in 30 days or less after all the documents have been submitted properly. If OJK perceives the documents to be incomplete, OJK will notify the applicant in 20 days or less.

• Companies that already have obtained the licence must start the business in two months or less.

Regulated by OJK

Regulatory Framework for Multi-Finance Companies

M


39

Capital requirements:

• Minimum paid-up capital of IDR100b (USD7.5m) for a limited liability entity.

• Maximum foreign ownership is 85% of paid-up capital.

• For publicly listed entity: Maximum floating shares of 85%. Local ownership needs to be maintained at a minimum level of 15% of the non-listed shares.

Foreign labour restriction:

• Companies can only hire a non-Indonesian employee as a consultant, advisor or high-ranked official (director or one level below director).

Membership requirement in other organisations:

• Multi-finance companies must become members of the appointed credit bureau.

• Multi-finance companies must become members of the appointed association.

Credit bureau:

• Multi-finance companies can subscribe to credit history data for customers from Bank Indonesia (BI checking) and Pefindo (private credit rating agency/credit bureau).

• Multi-finance companies can also retrieve information on blacklisted customers from the relevant association (Asosiasi Perusahaan Pembiayaan Indonesia).

Mergers and acquisitions:

• OJK defines controlling shareholder as a person or entity with 25% or higher ownership or proven to have been controlling the company directly or indirectly.

• Approval from OJK must be obtained before a change in controlling shareholder.

• By releasing regulation SE OJK No.1/seojk.05/2016, OJK has capped the acquisition cost (commission paid to the dealer in percentage terms of the revenue from one customer) at 15%.

• Regulators also capped the acquisition cost for 2W financing at 20%, based on our checks with industry players.

Acquisition cost for new 4W dealership

OJK also stipulates the conduct of a multi-finance company. The table below summarises the requirements/restrictions:

Multi-finance companies started to implement an NPL classification that is similar to that for banks (NPL being loans 90 days past due), effective January 2016. This was also reflected in the September 2016 NPL figures, which jumped to 3.4% from 2.2% in August 2016 (refer to the earlier section on page 16). However, there are still deviations for the write-off policies, depending on the level of conservatism.

Multi-finance companies may implement different collection and write-off policies. ADMF, for example, implements a 210-day automatic write-off policy while MTF implements 180 days. Provisioning, however, is more regulated. The companies need to set aside 100% provisioning after 180 days overdue.

The loan-to-value (LTV) regulation has been an effective tool that is often used by OJK to manage the multi-finance industry. Prior to 2013, there were no LTV criteria instituted for multi-finance companies. Despite that, there were some multi-finance companies which were more prudent than others and had their own criteria. During the boom times for 2W and 4W sales in 2010 to 2013, some multi-finance companies gave out financing without any down payment requirement.

In 2015, OJK relaxed the stringent LTV regulation to stimulate the sluggish economic growth. OJK further relaxed the minimum down payment requirement in May 2016 by issuing circular letter OJK NO.47/SEOJK.05/2016. With the new regulation, the minimum down payment was relaxed to as low as 5% for multi-finance companies with NPLs lower than 1%. This is a significant relaxation compared with the previous regulation, which required 15-20% down payment.

NPL classification similar to banks now

Collection and write-off policies may

vary; provisions are regulated

LTV regulation for auto financing


Diagram 52. Regulations/restrictions for operating a multi-finance company

Requirement/restrictions under POJK No 29/POJK.05/2014

Non Performing Financing max 5%

Financing to Asset Ratio min 40%

Minimum Equity Rp 100bn

Gearing Ratio max 10%

Foreign currency liabilities must be fully hedged

Cannot gather deposits directly from customers


Regulations/restrictions in operating a multi-

finance company

Source: OJK, DBS Bank*For companies which do not meet the minimum financial health indicators

Source: Indonesian Multi-finance Companies Association (Asosiasi Perusahaan Pembiayaan Indonesia)

Diagram 53. Multi-finance companies: Minimum down payment regulation changes

Diagram 54. Regulatory framework for multi-finance companies

MultiFinance

Company

Tax Provisions related to FCKYC

PMK 30/PMK.010/2010PER-05/BL/2011

POJK 3/POJK.05/2013SEOJK 6/SEOJK.05/2013



OJK 10/POJK.05/2014SEOJK 11/SEOJK.05/2014


POJK 28/POJK.05/2014POJK 29/POJK.05/2014POJK 30/POJK.05/2014POJK 31/POJK.05/2014

POJK 1/POJK.07/2013POJK 1/POJK.07/2014SEOJK 1/SEOJK.07/2014SEOJK 2/SEOJK.07/2014SEOJK 12/SEOJK.07/2014SEOJK 13/SEOJK.07/2014SEOJK 14/SEOJK.07/2014

Customer Protection

Monthly Report

OJK Fee

Risk Assessment

Financial Conglomeration

Business

Fit & Proper


41

Current Regulation Previous Regulation

NPF ≤ 1%

1%<NPF ≤3%

3%<NPF ≤5%

NPF ≤ 5%*

NPF >5%

NPF ≤ 5% NPF>5% For Syariah Entity

Before June 2015

Vehicle Conv. Syariah Conv. Syariah

2W 5% 10% 15% 15% 20% 15% 10% 20% 15% 15% 20%

4W - Productive

5% 10% 15% 15% 20% 15% 15% 20% 20% 15% 20%

4W - Consumtive

5% 10% 15% 20% 25% 20% 20% 25% 25% 20% 25%

Source: BI, OJK, DBS Bank

Diagram 55. How regulatory changes affected financing growth in the multi-finance industry


he regulators have been proactively issuing supportive regulations for multi-finance companies. Recently, OJK has pushed for multi-finance companies to adopt NPL recognition and provisioning policies that are similar to banks’. Going forward, we would not discount the possibility of the introduction of more

uniformed regulations vis-à-vis banks, including capital requirements.

We highlight that multi-finance companies generally have riskier business models as well as governance issues. Furthermore, there are also views that multi-finance companies can still enjoy their current niche position because the banks are still getting good margins from the bigger ticket size loans. This means that the banks (without any multi-finance companies as subsidiaries or associates) could decide to enter the financing business if they want to.

Weakening automotive business and lower commodity prices. A spike in inflation can also erode the purchasing power of middle- to low-income earners who are the main customers of multi-finance companies.

The gap in regulatory, supervisory and

corporate governance will narrow

Multi-finance companies can

continue to enjoy niche position

Key risks for the sector

Moving Forward

T


43



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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published 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 legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


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