Indonesia’s digital banks may face asset quality challenges despite continued profits: UOBKH 

INDONESIA’S digital banks are at the risk of facing asset quality “hiccups” even as they continue to gain market share and book profit improvements on the back of robust loan growth, according to UOB Kay Hian (UOBKH). 

In a Thursday (Sep 29) report, analyst Posmarito Pakpahan noted that 3 of the country’s digital banks – Bank Jago, Seabank and Bank Neo Commerce – have collectively raised their loan loss reserve (LLR) in August 2022 from the previous month, while also booking higher nominal LLR growth on a month-on-month basis. 

“Bank Jago has guided for higher non-performing loans (NPL) going forward as loans are scaling up, while Bank Neo Commerce’s loan-at-risk trended up to 21 per cent in H1 2022,” observed Pakpahan. 

Despite the asset quality risks, Pakpahan remains positive on the sector as a whole given digital banks’ increasing market share, improving profitability and positive developments in operations. 

The research house maintains “market weight” on Indonesia’s banking sector amid the de-rating of digital banks’ valuations due to adverse macroeconomic developments, rising inflation rates and interest rate hikes. 

With Indonesia’s Financial Services Authority requiring a total of 74 banks to increase their core capital to 3 trillion rupiah (S$286 million) by the end of this year, Pakpahan also believes H2 2022 will be a “busier time for small banks”. 

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“Given that there are more than 70 small banks in Indonesia, the competition to attract investors is heating up. Eighteen banks which are listed on JCI (Jakarta Stock Exchange Composite Index) are expected to conduct a series of corporate actions, such as rights issues, private placements and mergers, to raise funds in order to meet the Financial Services Authority’s requirement,” she said. 

Highlighting that Bank Jago is currently trading at a premium to its global and local peers, the analyst prefers Bank Neo Commerce for its cheaper valuation as well as comparatively higher deposits and loan market shares.