The Future of Digital Banks in Indonesia Will the Euphoria of Small Banks’ Shares Continue?

By Karnoto Mohamad

Shares of small banks that repositioned themselves into digital banks have increased the ones owned by giant banks. Why are the shares of digital banks having poor financial performances searched by investors? Will the euphoria of small banks’ shares be ended? What are the challenges for digital banks to be profitable? According to a study from Boston Consulting Group, among 249 digital banks, only 13 are profitable.

The resignation of Tigor M. Siahaan from the chair of  president director of Bank CIMB Niaga on October 22 has shocked bankers. This is because he is considered as a successful  banker in  improving Bank CIMB Niaga’s performance since taking the lead in March 2015. His performance is quite solid in the midst of the COVID-19 pandemic. The most notable improvement was the increase in the low-cost fund ratio from 44.77% in 2015 to 47.94% in 2016 which continued to increase in the following years, to 62.45% in June 2021. A number of Infobank’s sources mentioned Lani Darmawan as a candidate for Tigor’s replacement in the organization. “We are currently in the process of finding a replacement, Ibu Lani is one of them from within,” said one of the board of commissioners of Bank CIMB Niaga when asked for confirmation by Infobank, last October 22.

Meanwhile, Tigor Siahaan himself is rumored to be building a start-up with a large business group after leaving Bank CIMB Niaga. Tigor did not respond when Infobank asked for a confirmation of the news. However, if it is true, Tigor will follow in the footsteps of Jerry Ng, a senior banker who has succeeded in multiplying Bank BTPN’s assets for 10 years, leading to attract SMBC from Japan to be lured to take over its share ownership from the Texas Pacific Group. After completing the merger of Bank BTPN and Bank Sumitomo, Jerry resigned and together with Patrick Walujo bought Bank Artos at the end of 2019 and then changed it to Bank Jago which repositioned itself as a digital bank.

Jerry was successful in building a story of digital bank transformation. Although the losses suffered by Bank Artos since 2015 are still being experienced until June 2021 (September 2021 Bank Jago has made a profit, Rp. 14 billion), Bank Jago’s share price has flown from Rp 300-400 per share in early 2020 to Rp 15175 per share as of October 26, 2021. In fact, Bank Jago’s share price touched Rp 18375 on July 28, 2021 and its share capitalization reached Rp 241 trillion, making it the issuer with the fifth largest market capitalization on the stock exchange, surpassing the market capitalization of PT Astra Internasional Tbk which was at Rp 192 trillion. According to data from the Infobank Research Bureau per June 2021, Bank Jago still recorded a loss of Rp46.77 billion. The ratio of cheap funds is also tight because it is only 30.21% of  thirdparty funds (DPK).

Due to the soaring stock price, Bank Jago’s market capitalization has also outperformed many giant banks. For example, Bank Negara Indonesia (BNI) with a market capitalization of Rp 133 trillion (per October 26, 2021) was defeated by Bank Jago, with market cap was Rp 207.82 trillion. BNI’s share price is Rp 7275 per share. BNI’s assets per June 2021 reached Rp 852.50 trillion with an equity of Rp 98.53 trillion (non-consolidated), while Bank Jago’s assets were only Rp 10.09 trillion with an equity of Rp 7.88 trillion. BNI’s ability to obtain lowcost funds is much stronger with a ratio to third party funds (DPK) reaching 69.58%. Likewise, from the profit, BNI was able to print Rp 4,89 trillion.

However, digital banks seem to be a trending topic in the banking world and capital market investors. Although many small banks are under pressure, their positioning as digital banks is seen by investors as more prospective than big banks that have much better financial ratios.

Bank Jago seems to be a catalyst for some small banks to actively transform into digital banks. In the midst of the stagnant growth of the Indonesia Stock Exchange (IDX) during the current year, a number of bank issuers who are building digital stories have their share prices soared throughout 2021. In addition to Bank Jago, there is BRI Agroniaga (Bank Raya) whose shares flew 108.82.3% and Neo Commerce Bank which skyrocketed 416.79%, even Bank Allo Indonesia which soared to 4024.51%.

According to Infobank’s records, there are several banks that have recently transformed by positioning themselves as digital banks, such as Bank Maybank Syariah which became Bank Aladin Syariah, Bank Harda which became Allo Bank Indonesia, Bank BRI Agroniaga which became Bank Raya, Bank Royal which became Bank BCA Digital, and Bank Yudha Bakti which became the Neo Commerce Bank. Among these banks, only Bank BCA Digital has not yet gone public, but BCA as its parent is ready to take this bank to the stock exchange. However, as previously reported by many media, up to now, it is said that there are 14 banks that have received permits and are in the process of licensing to become digital banks at OJK.

Digital bank itself is a bank that appears as a digital bank. Wimboh Santoso, the Chairman of the Board of Commissioners of the Financial Services Authority (OJK), also said that his party had not yet issued a new license or permit for a fully digital bank. Moreover, with a capital requirement of Rp 10 trillion for the establishment of a new bank, it is very unlikely that any investor will choose to establish a new bank. If there is a bank that wants to be fully digital, it is directed to be owned by existing parties because the management is clear and has good risk management.

“Now, I know exactly what the DNA of these banks is. What business do I know? Whose family I know. New people are like unregistered online funds (pinjol), they don’t know who they are, then is it forbidden? No. However, for a new bank permit, the capital is Rp 10 trillion, who wants it, in the end, it’s better to buy small banks,” said Wimboh to Infobank at his office last month.

OJK also observes the existence of gimmick elements and by claiming digital banks to increase stock prices and so on. OJK has also requested that digital banks not be a kind of gimmick in marketing. “A number of banks claim to be full digital banks or will they transform themselves into full digital banks or digitalize conventional banks? Or just as a gimmick to increase the value of shares,” said Anung Herlianto, OJK’s Director of Banking Regulation and Research in a webinar held by the OJK Institute in October 2021.

Some argue that the soaring share of small banks is a euphoria that will have an end. One of them is Arwin Rasyid, a senior banker and market participant. According to him, unlike conventional banks, which are judged by the achievement of numbers, digital banks are judged by stories about prospects and business potential in the future.

“Just euphoria, people’s perception that prices will continue to rise. Therefore, people want to buy and automatically the price keeps going up. But in the end, it is the performance, building a digital bank takes time, investment, strategy, systems, procedures, marketing, and more,” he told Infobank last month.

Ryan Kiryanto, economist and banking observer, also believes that small banks’ shares  condition is inseparable from the low literacy of retail investors, which is now dominated by the millennial generation. “Retail investors have not been sufficiently educated with the ins and outs of the capital market, they are still in the learning and learning stage. They are in the process of becoming true investors whose investment orientation is long-term to earn dividends,” he told Infobank last month.

In addition, the market share of DPK is still very much controlled by the giant banks. Of the total DPK that reached Rp 7000 trillion, digital banks’ market share was only around 5%. Because companies and individuals who have a lot of money don’t want to put savings and current accounts of hundreds of millions to billions of rupiah, so how do digital banks face the challenge of how to get cheap funds, namely demand deposits and savings or CASA.

Currently, investors in the capital market are increasingly generation Y. From 6.1 million stock investors in Indonesia, 80.46% of them are investors aged 40 and under. Millennials are generally digital minded and when they enter the stock market, they are more interested in shares of companies that position themselves in the technology sector. With the perception created by influencers in the market who are keen to build the perception of retail investors who are generally inexperienced, they also buy shares without understanding the company’s fundamentals, namely net income or earnings per share (EPS), dividends and future growth.

Imagine, stock prices that can increase 5 times or 10 times and even 20 times the book value or price book value (PBV), while traditional bank shares are only valued between one and two times the PBV, except for BBCA.

A senior banker who currently sits on the board of commissioners of a bank with a capital of more than Rp 30 trillion reminded that the euphoria of shares of small banks selling this digital bank gimmick will sooner or later pass. “Wherever the bank’s main source of profit comes from the spread or net interest margin (NIM), which is disbursing large amounts of credit with a small cost of funds or high CASA. Meanwhile fee-based income is only a small part and has never been a mainstay. “I feel sorry for small retail investors and digital bank depositors, because if one fails, it could have systemic consequences for its category, such as Century Bank in the past, where LPS had to step in,” he told Infobank last month.

According to data from the Infobank Research Bureau, the contribution of interest income still dominates total banking income, despite a downward trend. Since the banking industry no longer enjoyed credit growth of more than 20% in 2014, banks have been trying to boost non-interest income. The contribution of interest income to total bank income was 74% in 2018, 72% in 2019, 66% in 2020, and 61% as of July 2021. The increase in noninterest income or fee-based income is also driven more by giant conventional banks with very large customer base.

In addition, the market share of DPK is still hugely occupied by the giant banks. Of the total DPK that reached Rp 7000 trillion, digital banks’ market authority is only around 5%. Because companies and individuals who have a lot of money don’t want to put savings and current accounts of hundreds of millions to billions of rupiah, so how do digital banks face the challenge of how to get cheap funds, namely demand deposits and savings or CASA.

It should be noted that the main key to bank profits still comes from the spread or NIM, namely how to distribute large amounts of credit at a low cost of funds. Meanwhile, of the nine issuer banks that position themselves as digital banks, the average CASA ratio is only 25%, except for Bank Aladin, which seems to only rely on current accounts and “throw away” their savings and deposits. Meanwhile, large banks generally have CASA ratios above 50%, such as BCA at 78%, Bank Mandiri at 73%, BNI at 69%, Bank CIMB Niaga at 62%, or BRI at 60%.

Therefore, it is not surprising that giant bankers are still optimistic about their future despite realizing that going digital is something that must be done. Indra Utoyo, the Director of Digital and Information Technology at BRI, said that the digital factor is not the one that makes people believe in placing their funds in a bank. “Digital cannot replace trust, brand, and survive. However, without digital, we can’t obtain those things,” he said in a webinar that was held in October 2021.

Considering that it is hard to predict the future of small banks that position themselves as digital banks, will the euphoria related to the shares of those small banks come to an end? It depends on the patience level of investors to be able to receive dividends. Meanwhile, studies say it takes two to five years for digital banks to be able to make a profit. It also depends on the digital bank whether it will be successful or not. This is because a study conducted by Boston Consulting Group says that among 249 digital banks in the world, only 13 are profitable. In South Korea, of the three digital banks, only one is profitable. The bank is Kakao Bank. In China, there are 16 digital banks. However, only four banks that are profitable; one of them is WeBank.

How is the condition in Indonesia? Jahja Setiaatmadja, the President Director of BCA, has ever said that there will be only three digital banks that will survive in Indonesia. It is the time that will answer whether the statement is true or not, as well as what digital banks will survive. (*)