EY Banking Publication 2020

Indonesian banking
industry
Maintaining resilience
amidst the headwinds
June 2020
Foreword
Executive Summary
The Indonesian Financial Services Authority (“OJK”) has taken bold action to
transform the Indonesian banking industry landscape. However, the consolidation did
Table of Contents
not materialize as planned. Recently OJK issued new regulations to ensure a faster
consolidation, hence the banks have stronger capitalization and are able to support
Executive summary 2
the economic growth of the country.
Banking profitability has been declining in the recent years due to competition and Recent updates 4
lower economic growth, yet still exhibits the highest profitability in Southeast Asia
• Maintaining resilience amid the challenging period
(“SEA”). Loan growth slowed down to single-digit at 8% compound annual growth rate
(“CAGR”) in 2015 - 2019, with loan in 2019 grew at the slowest rate in five years,
growing at 6%, as a result of weakening global demand. The Government of Indonesia, Banking landscape 6
along with OJK and Bank Indonesia, have issued a series of stimulus and regulations • Consolidation trend in the banking sector
to weather the challenging period, due to the Corona virus 2019 (“COVID-19”).
• Key players
Indonesian banking penetration is one among the lowest in the SEA countries. In • Assets and third-party funds performance
recent years, the emergence of financial technology (“fintech”) players have been • Industry growth
assisting banks to reach the unbanked population and facilitate digital payments. The
• Banking penetration
growth of fintech players is supported the rapid growth of tech-affluent population in
Indonesia.
Digital banking and emergence of fintech players 15
One of the key success factors for banks to respond to market pressures and
• Indonesian digital banking landscape
competition, as well as to grow profitably, is to push for digital innovation. Taking
• Emergence of fintech players
advantage of the digitalization era, Indonesian leading banking players have
responded through development of innovative digital banking products and
cooperation with fintech players. The aim is to create a sustainable growth that drives Regulators and Regulations 24
long-term value and ultimately tap the underbanked and unbanked population to reach • Regulatory environment
the financial inclusion.
• Banking consolidation
Amidst the headwinds, a number of mergers and acquisitions (“M&A”) transactions • Banking industry issues
were successfully closed in 2019, as the challenging environment led to a more • Government stimulus in response to Covid-19
attractive valuation. This trend will likely to continue, as during this challenging period,
smaller banks are left with not much options, either to improve their core capital or to
find suitable partners. M&A banking transactions in Indonesia 27
• Mergers, share acquisition and capital market transactions
• Pursuing organic and inorganic growth strategy for Banks
Opportunities to invest in Indonesian banks 29

• Key rationales of investing in Indonesian banking industry
• Final Remarks: Re-shaping the future of Indonesian
banking industry
Appendix 31
Maintaining resilience
amidst the challenging
period
Navigating challenges amidst the headwinds Maintaining resilience through offering several stimulus
Year 2020 is going to be a challenging year for the banking Banking performance in 2019 were slower compared to OJK and Bank Indonesia (“BI”) have issued several stimulus
sector, as the COVID-19 pandemic situation continues to prolong previous years, as loan growth softened to a mid-single in order to minimize the impact of the pandemic situation.
for quite some time. Banking growth will be adversely affected, digit growth of 6.1% YoY. Likewise, profitability is still on the Up to date, OJK has issued a relaxation for loan quality
declining trend, as it booked a slightly lower NIM at 4.9%, on assessment and restructuring requirements for debtors hit by
with non-performing loans (“NPL”) ratio is expected to further the back of declining interest rates environment. Going forward, the pandemic. Moreover, in order to maintain resilience and
hike under this unprecedented situation. Nonetheless, the it is going to be a challenging year for the banking sector, as stability of the banking sector, banks are required to report
regulators have prepared several stimulus in order to maintain one of the sectors that will be adversely affected under the the list of debtors receiving the stimulus regularly.
COVID-19 situation. Banking profitability would be affected,
resilience including the delay of the PSAK 71 implementation. During this challenging time, OJK is also keen to pursue
as many business sectors will be severely impacted under
this unprecedented situation, resulting in deteriorating assets its banking consolidation plan by issuing a new regulation
quality, higher probability of default and loan restructured. as part of their effort to strengthen the capital structure
and competitiveness of the banking industry. An updated
Furthermore, EY expects banks to focus on stabilizing their regulation on the single presence policy has been issued,
assets quality and managing other potential risks, rather allowing controlling shareholders to own one or several
than focusing on business expansion, which will result in a banks with consolidation scheme. OJK has also increased the
limited room for growth this year. As such, the regulators minimum core capital requirement gradually to IDR 3tn by
have prepared several stimulus in order to maintain banking 2022, from the initial IDR 100bn of minimum core capital.
resilience amidst the unprecedented situation.
Page 4 | Indonesian banking industry: Maintaining resilience amidst the headwinds Indonesian banking industry: Maintaining resilience amidst the headwinds | Page 5
Banking landscape
Consolidation trend in the banking sector Merger of: Key players

• Bank Mitraniaga and Bank Agris by Industrial
Figure 2.1. Number of banks in Indonesia Bank of Korea, becoming IBK Indonesia
A few private banks and state–owned banks
• Bank Dinar and Bank Oke Indonesia
(previously Bank Andara), becoming Bank dominate the Indonesian banking landscape
Oke Indonesia
Merger of: Indonesian banking landscape comprises 1,542 rural banks and smaller assets, and Bank Central Asia (“BCA”) as the largest
• Bank Danamon and Bank Nusantara
• Bank Metro Express and Bank 110 conventional banks. Out of 110 banks, 96 are conventional private bank in Indonesia. The three banks have the largest
Parahyangan by Mitsubishi UFJ Financial
Centratama Nasional Bank by
Group, becoming Bank Danamon as the banks (consisting of three state–owned banks and four private amount of assets, loans, and revenue, with excellent asset
Shinhan Bank, becoming Shinhan
surviving entity banks which considered as the largest banks in the region) quality and strong banking capitalization.
Bank
• Bank Tabungan Pensiunan Nasional and and 14 sharia banks. Furthermore, the conventional banking
• Bank AntarDaerah and Bank Windu The state-owned banks are the main contributors to the overall
Bank Sumitomo Mitsui Indonesia by SMBC, category also includes joint venture, regional development,
Kentjana by China Construction Merger of:
becoming as Bank BTPN as the surviving loan growth in Indonesia. They have a stronger push from their
Bank, becoming China • HSBC Bank and Bank Ekonomi, and foreign banks’ branches representative. Previously, under
entity stakeholders to improve the level of financial inclusion across
Construction Bank Indonesia becoming Bank HSBC the “single presence policy,” an investor would not be able to
Closing down of: the country. For instance, in terms of size, the state-owned
Indonesia1 have a majority stake in more than one bank. Investment in an
• Rabobank International Indonesia, after banks are larger and have more expansive networks and access
Indonesian bank by foreign financial institutions is capped at
selling majority of its assets to Bank Central to customers. Many smaller banks are limited by their smaller
Asia 40%; however, authorities can permit a larger stake in certain
118 circumstances. footprint and higher cost of funds to grow its loan book.
116
115 115 Figure 2.2. Total number of conventional banks in Indonesia in 2019
The top 10 banks in Indonesia have contributed to
approximately 70% of total assets in the national banking
110 sector. Dominated by state-owned banks, with Bank Rakyat
Indonesia (“BRI”) being the largest bank in Indonesia in terms
2015 2016 2017 2018 2019 of assets, followed by Bank Mandiri (“Mandiri”) with slightly
“
More banking mergers and
acquisitions are expected in the
Banking consolidation era
Since 2014, OJK has put an effort to reduce number of banks operating in
Indonesia by 50% in the next 10 years. The reduction of banks was done through
have shown keen interest in entering the industry.
These foreign banks have played a role in the banking
near future, driven by OJK new consolidation by means of mergers and acquisitions. consolidation, following the unwritten regulation which
stipulates that foreign banks involving in the majority
core capital regulation as part
acquisitions need to acquire two banks and merge these
of their consolidation plan. OJK is pushing towards a faster consolidation banks, which then reduce the number of banks.
Over the past five years, the number of banks in Indonesia have been declining Two of the recent notable transactions are the merger of
gradually, from 118 banks in 2015 to 110 banks in 2019. However, it seems that Bank Tabungan Pensiunan Nasional (“BTPN”) and Bank
the banking consolidation did not go as planned, as it only reduces 8 banks over Sumitomo Mitsui Indonesia by Sumitomo Banking Mitsui
the past four years. Hence, to accelerate the consolidation, OJK has issued a new Corporation (“SMBC”) in 2018 and the merger of Bank
regulation, which requires banks to gradually increase their core capital up to Danamon Indonesia and Bank Nusantara Parahyangan
IDR 3tn by end of year 2022. There are approximately 35 banks with core capital by Mitsubishi UFJ Financial Group in 2019. Moreover,
below IDR 3tn as of Q1 2020, and some of these banks have started looking fintech players have also started to acquire banks in
target for acquisition or to merge with. The one pursuing this initiative earlier will order to expand their business, i.e. the acquisition of
have a first mover advantage to choose its partner. Bank Yudha Bhakti by Akulaku started in 2018. A few
fintech players are also in the midst of discussion with
Underpinned by Indonesia’s large population, underpenetrated banking sector
smaller banks, with more transactions are expected to
and relatively high profitability, a number of prominent foreign banking players
occur from this space.
1 HSBC Indonesia acquired Bank Ekonomi earlier in 2008. Later in 2017, HSBC Indonesia has decided to merge with Bank Ekonomi, becoming Bank HSBC Indonesia.
Figure 2.3. Indonesia top 10 banks1 financial performance (2019)
Industry growth Figure 2.7. Loans market share
BUKU 3 and BUKU 4 banks are still

dominating the industry
Indonesian banking industry is

concentrated to a few top players, mostly
categorized under BUKU 3 and BUKU 4
banks. This trend is likely to continue as
OJK is planning to further consolidate the
Different year, same trend
industry.
Indonesian banking industry is highly dominated by BUKU
3 and BUKU 4 banks3, which accounted for ~80% of loans
Best performer Least performer Above average Below average and third party funds. Looking further, Indonesian banking
landscape is concentrated to several banking giants,
which are Bank Central Asia, Bank Mandiri, Bank Rakyat
Indonesia, and Bank Negara Indonesia, as the vast majority of
Assets and third-party funds performance Indonesian population conducts various banking transactions
through these banks. This trend is likely continue to persist in
Anticipating a slowdown: slower banking growth outlook
the future, further driven by OJK banking consolidation plan.
Given the recent economic slowdown due to the prolonged COVID-19 pandemic,
Figure 2.8. TPF market share
banking assets and third-party funds (“TPF”) will be growing at a slower pace.
Figure 2.4. Banking industry assets performance (in IDR tn) Figure 2.5. Banking industry loans (in IDR tn) Figure 2.6. Banking industry TPF (in IDR tn)
1.0 5,617
5,295 5,999
4,738 1.0 5,630
0.8
4,058
4,377 4,837 5,289
3,674 0.8 4,413
0.6 3,293 4,114
2,708 3,664
2,200 0.6 3,225
0.4 1,766 2,785
2,339
0.4
0.2
0.2 Declining profitability trend: consolidation is key
0.0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0.0 Banking profitability has been on a declining trend in
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
the recent years, as ROE from each BUKU class has
Source: OJK Source: OJK Source: OJK
been declining simultaneously, except for BUKU 3 which
Banking assets performance: the new normal Softer loan growth in 2019; bracing for further decline ahead Sustained TPF growth experienced an increasing profitability. Hence, in order to
obtain favorable ROE, banks need to develop unique product
Indonesian banking assets has enjoyed a sturdy growth The industry has enjoyed a remarkable loan growth during Growth in the third party funds is mirroring the assets growth,
and market positioning. Nonetheless, Indonesia banking
during 2010-15 by booking a double-digit of 17% CAGR. This 2010-14, booking 20% CAGR during that time. A slump in as it booked a lower “new normal” growth in 2015-19
industry still exhibits the highest ROE in the SEA region,
sturdy growth was underpinned by a higher GDP growth and commodity prices and lower economic growth led to a single- compared to double-digit growth in 2010-14. The new growth
booking 14% ROE in 2019, and Vietnam booking the lowest
commodity boom during this period, whereas from 2015-19 digit loan growth of 8% CAGR in 2015-19. Loans in 2019 grew trend is also due to emergence of various investments products
ROE at 10%.
the growth has stabilized to a single-digit of 8% CAGR. This at the slowest rate in five years, growing at 6%, as a result and people are more savvy in managing their investments.
might be the new normal growth phase for banking assets, as of weakening global demand. Furthermore, given the recent Net income contribution is largely dominated by BUKU 4
global economy is slowing down compared to previous years. global economic slowdown due to COVID-19 outbreak, declining banks, contributing >50% to total net income. This situation is
business activities and limited room for investments spending partially attributable to the increase in BUKU 4 banks, hence
are expected, hence causing a slower credit expansion and resulting in the rising net income contribution.
an increase of debt restructuring cases. However, Indonesia’s
GDP growth is expected to grow by 0.5% in 2020 and will have
a quick recovery of 8.2% in 2021, signalling a sharp recovery
3 BUKU banks are classified by their core capital amount. Below is the classification:
after an economic slowdown. • BUKU 1: Core capital above IDR 100 bn – IDR 1 tn;
• BUKU 2: Core capital above IDR 1 tn – IDR 5 tn;
• BUKU 3: Core capital above IDR 5 tn – IDR 30 tn; and
2 Top 10 banks are defined in terms of assets | Source: Company Financial Statements, EY analysis
• BUKU 4: Core capital above IDR 30 tn.
Figure 2.9. Banking industry net income (in IDR tn) Figure 2.10. Banking industry ROE (%) BI policy rate: entering the credit easing Figure 2.16. BI policy rate trend
25% 21% cycle

20% 17%
15%
BI is likely to maintain its dovish stance
9% 10%
10% through lowering the BI rate, as part of the
7% 8%
5%
5%
Government’s credit easing plan in order
9%
0% to maintain economic stability.
2015 2016 2017 2018 2019
Entering the credit easing cycle

Source: OJK
Back in 2018, BI has implemented tightening monetary

policy, as BI rate rose 175 bps to 6% in 2018, in order Source: Bank Indonesia
Figure 2.11. Comparison of ROE in the region (2019, %) to stabilize the currency during that time. Afterwards,
Figure 2.17. Net interest margin (“NIM”)
as the currency started to stabilize in 2019, BI changed
its stance to dovish by lowering the policy rate further 5.63%
by 100 bps to 5% as of December 2019. Furthermore, 5.39%

5.32%
aware of the ongoing economic slowdown, BI remained
5.14%
cautious as the policy rate is lowered to 4.5% in March
2020. Going forward, the Central Bank is expected to 4.91%
maintain the dovish stance in order to withstand the

declining business activities and maintain economic
stability.
2015 2016 2017 2018 2019
Source: OJK
In terms of performance, larger banks tend to Figure 2.12. Net interest margin (%) Figure 2.14. Loan to deposit ratio (%)
outperform smaller players Flattish NIM outlook
Historically, larger banks (BUKU 4) have been performing well Given the current situation, the Government has been taking
with relatively higher net interest margin and significantly some efforts in order to maintain the economic resilience,
lower operational costs (“BOPO”) compared to other classes including lowering BI rate further and urging the banks to
(BUKU 1, 2, and 3). In other words, banks with larger assets, lower their lending rates. This situation will likely to lower the
greater market size, and broader customer-base tend to loan yield further, as a result NIM is expected to be flattish
outperform smaller banks, by utilizing their capital in a more going forward.
efficient way. From 2015 to 2019, BUKU 4 and BUKU 3 banks
have experienced an increasing trend of loan to deposit (“LDR”) Figure 2.18. NIM comparison
ratio, while BUKU 2 and BUKU 1 banks have experienced the
opposite – indicating a struggle in loan disbursement. In terms Figure 2.13. BOPO (%) Figure 2.15. Capital adequacy ratio (%)
of capital adequacy ratio (“CAR”), BUKU 4 and BUKU 3 banks
booked an increasing CAR which indicates stable and growing
return on equity.
BUKU 1 banks yield higher net interest margin than BUKU 2 and
3 banks. This is attributable to riskier loan portfolio distributed
by BUKU 1 banks. However, BUKU 1 banks tend to be less
efficient by scoring a slightly higher BOPO ratio compared to
BUKU 2 and 3. Despite having booked a significant increase
in CAR during 2019, these banks are still subject to OJK’s Source: EMIS, Bank of Thailand, Monetary Authority of Singapore
requirement for capital augmentation. As stipulated in the new
The highest NIM in the region
OJK regulation, banks are required to top up additional capital
to reach core capital of IDR 1 tn, IDR 2 tn, and IDR 3 tn by the Compared to other SEA countries, which are Thailand,
end of 2020, 2021, and 2022, respectively. As of March 2020, Source: OJK Philippines, and Singapore, Indonesia has been consistently
30 banks still have core capital below the first milestone in the Source: OJK booking the highest NIM for the past five years, with NIM
OJK new requirement of IDR 1 tn. being stable at around 5%. Other countries have relatively
lower NIM, with Philippines stood as the second-highest at
4 Singapore ROE is as of 3Q19 | Source: OJK, Bank Negara Malaysia, Monetary Authority of Singapore, Bank of Thailand, EMIS 5 2019 Singapore NIM is as of 3Q19
Figure 2.21. Indonesia’s non-performing loans based on sector Further, driven by the needs of digitalization, banks are also
around 3.5% NIM on average. This situation is attributable growing the number of digital agents as touch points for
to a few top banking players in Indonesia being the market customers. In the past 5 years, number of banking digital
leader in micro and consumer lending, able to command agents has been growing rapidly from only 69,548 agents in
higher margin. As this implies favourable profitability in the 2015 to 503,443 in 2019 (an equivalent CAGR of c. 64%).
Indonesian banking sector, this situation is also partially As a result of these initiatives, efficiency measure has been
due to higher interest rate environment compared to other improving, especially for the top 4 banks which are very active
countries, thereby resulting the highest NIM in the region. in performing the digitalization initiatives. This initiative has led
to a lower cost-to-income ratio for the top 4 banks compared to
its peers.
Bracing for higher NPL levels driven by Figure 2.23. No of branch, ATM machine, and digital agents in
Indonesia (in thousand)
upcoming economic slowdown
Historically, the NPL ratio rose to the highest of 2.93% in 2016,
on the back of aggressive loan growth booked on the previous
years coupled with commodity slump after 2014-15. Over
the years, NPL ratio has been dominated by wholesale and Source: OJK
retail trade industry, followed by processing industry, as this is

Figure 2.22. Indonesia’s total loans based on sector
aligned with total loan contributors by sectors. Nonetheless,
the industry succeeded to improve the assets quality, as NPL
ratio decrease gradually to a healthy level of 2.53% in 2019,
underpinned by OJK’s more stringent regulation in loan
disbursement and a recovery in commodity prices.
Compared to other Southeast Asian countries, Indonesia’s

NPL ratio is higher than others, mainly due to higher credit
risk. Going forward, headwinds caused by the COVID-19 would
hamper the loan growth and deteriorate the asset quality,
therefore resulting in the hike of NPL. Following the new OJK
regulation to relax loan quality assessment and restructuring Source: Bank Indonesia
requirements due to the COVID-19 pandemic, more loans are

Figure 2.24. Cost-to-Income ratio (%)7
predicted to be restructured in the next few months. As of
April 2020, a few of BUKU 4 banks such as BCA and BRI have
restructured more than IDR 100tn of loans.
Figure 2.19. Indonesia’s historical non performing loans ratio Source: OJK
2015 2.49% In the past 5 years, Indonesian banks have

2016 2.93%
been trying to substitute the role of branch
offices with ATM and digital financial service
2017 2.59%
agents
2018 2.37%
Over the past five years, number of banks’ branches have been
2019 2.53% decreasing from 32,953 branches in 2015 to 31,127 branches
in 2019. To be more efficient, banks have been closing down
Source: OJK
their branch offices that typically provide basic services, such
Figure 2.20. ASEAN non performing loans ratio (2019) as bank account opening, cash deposits and cash withdrawals. Source: Bank Mandiri’s annual corporate presentation 2015 - 2019.
While number of automatic teller machine (“ATM”) machine
seems flat, changes have occurred in the composition of
ATM type. Banks are replacing the ATM machine to more
advanced technology, i.e. cash recycling machine (“CRM”). For
6 Digital financial service agents are individuals and institutions that provide basic financial
instance, as of November 2019, BCA has recorded to operate services (such as bank account openings, cash withdrawal, cash deposits, and payment)
using mobile-based/ web-based technologies and infrastructures to support the national
approximately 16,965 ATM machine, with 6,888 (c. 40%) of financial inclusive program (“Laku Pandai”).
which are CRM. Similarly, BRI operates 19,184 ATM, with 7 Cost-to-Income ratio (CIR) is overhead costs (including salaries and G&A expenses) as a
percentage of operating income (including net interest income and non-interest income).
3,809 (c. 20%) of which are CRM-type. This conversion-to-CRM The figures used in the chart are aggregated average CIR of BCA, BRI, Mandiri, BNI, Panin,
CIMB Niaga, Danamon, Permata, Maybank, and BTN – that were annualized from YTD
initiative is expected to reduce the logistics costs of distributing September figure of each year
Source: CEIC money.
Banking penetration
Indonesia banking penetration is one of the Indonesian digital banking landscape:
digitalization in the banking industry
lowest among the Southeast Asian countries
Indonesia is well known as an archipelago with more than Development of digital banking and fintech start-ups could
17,000 islands. Thus, Indonesia’s geographical characteristics potentially improve the current Indonesia’s financial inclusion.
make it challenging for banks and other financial institutions Through their innovative market penetration strategy, fintech
to reach unbanked population in remote areas. Compared to would reach those who are unable to access banks and other Figure 3.1. Indonesia’s age group demographic (2018)
other SEA countries, it is estimated that less than 49%8 of financial institutions due to geographical constraints. Digitalization in the banking industry is
the Indonesian adult population (aged 15 and above) own an backed by tech-affluent population in
In recent years, Indonesia’s fintech industry has been growing
account in a financial institution, which considered as banked
rapidly in terms of investment, range of services, and market Indonesia
population. Whilst, based on World Bank report in 2018,
penetration. Some fintech branchless banking programs
Indonesian commercial bank penetration is roughly 17.4 Rapid growth in banking digitalization and
branches for every 100,000 adults. which accelerate the development of financial technology,
for instance, could help overcome the country’s geographical emergence of fintech players are supported by
On both accounts, Indonesia’s unbanked population is on par barriers to achieve financial inclusion. Initiatives to support Indonesia’s sizeable youth and tech-affluent
with the middle-income economies’ average. To help address the sector by the regulators are to include the setting up of the
population, and expanding middle class.
this issue, the Government has introduced a national strategy fintech office, the launch of the national payment gateway, and
for financial inclusion in November 2016. One of the objectives the establishment of the fintech regulatory body for peer-to- Tech-affluent population: providing a solid growth for the
of this plan is to expand the share of the banked population that peer lending services. nation’s digital banking
holds an account in a financial institution to 75% in 2019. In
Source: Central Bureau of Statistics, population pyramid.net
December 2019, BI recorded that Indonesia’s financial inclusion Tech-affluent population is classified within three generations:
index (“FII”) have surpassed the target at 76.2%. Generation X (40-54 years old), Millennials (20-39 years old), Figure 3.2. Indonesia’s age group demographic (2018)
and Generation Z (10-19 years old). Generation X is the early
adapter of internet and digital technology, Generation Z is
Figure 2.25. Indonesia’s savings and borrowings penetration among SEA countries the most adaptive age group, and Millennials are tech-savvy
population currently in their prime-working age with the highest
consumption to income ratio. Majority of Indonesian population
consists of tech-affluent Generation X, Millennials, and
Generation Z, which will provide a solid ground for the growth in
the nation’s digital banking.
Moving towards digital banking: internet banking dominating

the transaction
Aware of the huge potential offered by the digitalization, many

banking players have developed an extensive digital banking
infrastructure along with the rapid technological advancement. Source: OJK, Bank Indonesia, Company
This results in a growing digital banking environment in terms
of transaction value, as internet banking transaction has
succeeded to overtake ATM transaction, by contributing around
50% of the total banking transaction over the past five years.
Transaction through ATM has been on the declining trend,
implying changing customer preferences to online and mobile
devices banking transaction.
Going forward, it is expected that mobile banking will dominate

the banking transaction, as this transaction is expanding
gradually from only 7% in 2015 to 18% in 2019. Increase in the
mobile banking transaction is underpinned by rapid smartphone
penetration in Indonesia, as the country currently has 83
million smartphone users. Transaction through electronic
money (server-based and chip-based) is also gaining traction,
backed by the Government’s tremendous efforts to shift the
nation towards a cashless society.
1 Internet banking transaction is calculated from the total of BCA, Mandiri, and BNI.
8 World Bank 2017 (Banking penetration is based on the percentage of respondents aged 15 years and over who report having an account (by 2 Mobile banking transaction is calculated from the total of BCA, Mandiri, BNI, and BRI.
themselves or together with someone else; can include mobile accounts), OECD, BI
3 Electronic money is defined as the value of money stored electronically in a medium such as
server or chip.
Page 14 | Indonesian banking industry: Maintaining resilience amidst the headwinds
customer centricity does not happen overnight, but banks can
Growth of digital banking is highly Figure 3.5. Digital banking products developed by Indonesia’s leading banks
begin immediately by building on the latent trust of existing
driven by the growing of internet users customers, improving their experience and taking strategic
and rapid adoption of digital payment E-
approach to meeting wider expectations. E-wallet Mobile Branch-
transaction Leading Internet Mobile money QR
(server- phone less
Figure 3.4. Digital payment4 transaction in Asia 2019 banks5 banking banking (chip- code
(in USD bn) based) account banking
Digital technology will continue to disrupt and transform the
based)
banking landscape in Indonesia. Consumers are increasingly
open to digital channels and digitally active consumers Bank BRI BRI internet BRI SMS
BRImo Brizzi LinkAja LinkAja Agen BRILink
bring more economic value to their banks. Given the rapid banking banking
17% market share
opportunity to grow, competition from both within and outside
the banking sector are expected to become more intense. Banks Mandiri Mandiri Mandiri e-cash,
should continue their digitalization efforts, and move quickly Mandiri online E-money Mandiripay Mandiri SMS AgenMu
internet LinkAja
to attract new customers and build loyalty in their existing 16% market share
customers.
BCA
KlikBCA m-BCA Flazz Sakuku QRku Duitt LAKU
Concurrently, Indonesia’s internet user and penetration are 11% market share
expected to rise significantly over the years. As a result of
growing tech-affluent population, large base of internet users BNI BNI internet
BNI mobile BNI TapCash
UnikQu,
YAP!, LinkAja
BNI SMS
Agen BNI46
banking LinkAja banking
are providing a solid ground for the growth in the nation’s 10% market share
digital banking. In respect to growing tech affluent population,
Indonesia expects to maintain the increasing trend in digital CIMB Niaga Rekening
CIMB Clicks Go Mobile WeChat Pay6 WeChat Pay2 Xtra Pandai
banking penetration through smartphone adoption and Ponsel
3% market share
therefore would create more competitive dynamics in the
Source: Statista, Euromonitor, Edelman trust Barometer2019
industry. Panin
InternetPanin MobilePanin FlazzPanin
Figure 3.3. Indonesia’s internet user and penetration 3% market share
Stepping into the digitalization era: big BTPN BTPN Sinaya

Jenius BTPN Wow!
Online
players are jumping on the bandwagon 2% market share
Leading banking players in Indonesia have managed to utilize

Source: Company website, Kontan
the digitalization era through the development of various
digital banking products, in order to create a superior customer 5 Market share is defined by assets value
6 WeChat Pay has obtained license from Bank Indonesia to legally operate in Indonesia through
experience and also to support digital financial inclusion, partnering with CIMB Niaga, acting as the acquirer of the transaction
by tapping the underbanked and unbanked population in
Indonesia. Nowadays, people could easily obtain access to their
accounts, make payments, and transfer money without physical
Stepping into the digitalization era:
presence at the bank, through various platforms of digital
banking products. Furthermore, it is worth highlighting that changing customer preferences
banks who have developed an extensive digital banking platform
are reaping the benefits from the current COVID-19 situation, Nowadays, most of the banking transactions
Source: Statista, Euromonitor, Edelman trust Barometer2019
where people are urged to stay at home, thereby limiting the are done through electronic channel, offering
physical mobility. It is expected that digital banking transactions
Competitive dynamics meaning that Indonesian banking players more flexibility to the vast majority of banked
will become a new business culture following the current
would need to continue investing in building digital banking situation, which can lower the risk of COVID-19 transmission population.
capabilities to further drive efficiency and productivity. For compared to the conventional physical presence at the bank.
instance, enable them to better serve customers as effective as Market leader among the digitalized banks
possible, particularly across markets. Doing this successfully will Of all the leading banks with >2% market share, BCA, Mandiri,
Looking into the further detail to various digital initiatives taken
provide room for growth to help banks reach more customers, BNI, and BRI are the most adaptive banks towards the
by the leading banks towards the digitalization era, BCA is the
especially unbanked and underbanked individuals as well as digitalization era, as they have developed a complete set of
market leader on the mobile banking transaction, as BCA has
micro, small and medium-sized enterprises. digital banking products ranging from internet banking to quick-
the highest number of mobile banking transaction in 2019.
response (“QR”) code. Other leading players are also catching
Changing expectations and increased competition make it even Other leading banks are following the trend, by booking a sturdy
up, such as CIMB Niaga that recently partnered with WeChat
more challenging for banks to remain relevant to customers. growth in the mobile banking transaction year-by-year.
Pay as the transaction acquirer and BTPN launched its mobile-
But, high performing organizations understand that creating a banking application “Jenius”, in order to tap the attractive
customer-focused culture and allowing investment in the digital young adult population in Indonesia.
transformation programs are critical to lift profitability in tough
conditions and ultimately drive long-term value. Building true
4 Digital payment is defined as payments for products and services which are made over the
Internet as well as mobile payments at point-of-sale (POS) via smartphone applications.
Indonesian fintech sector: various business models across Figure 3.11. Various initiatives taken by the Government
Figure 3.6. Comparison in mobile banking transaction (2019) its value chain
Indonesian fintech ecosystem encompasses various business

models across its value chain, offering numerous digital
financial services addressing consumers needs with tech-
enabled and data driven solutions. From digital payments (e.g.
e-wallets, payment gateway, virtual accounts), digital lending Launching of standardized QR-code
(P2P lending), to digital insurance (insur-tech). Indonesian (QRIS)
fintech ecosystem is dominated by P2P lending (43%) and
digital payments (26%).
2019
Supportive regulators towards building a cashless society
The Government has been undertaking various initiatives in Issuance of e-money regulation
Source: Analyst presentation, Annual reports
fintech development in Indonesia through issuing relevant
regulations and granting licenses for qualified fintech players.
Internet banking: BCA strikes again, whilst Mandiri leads on e-money transaction Furthermore, Bank Indonesia has issued several regulations,
with the most recent one is the national Quick Response 2018
Looking to internet banking transaction, BCA has the biggest number of transactions and transaction value, with transaction value
Indonesia Standard (“QRIS”) implementation effective in
reaching IDR 10,701tn itself through the internet banking platform. On the other hand, Mandiri leads the e-money transaction, by
January 2020, standardizing QR-based electronic payments Issuance of regulation on regulatory
booking the highest number of transactions and number of cards, as Mandiri was the pioneer on the e-money market.
that uses QR codes (e.g. server-based e-money or e-wallet). sandbox2
Figure 3.7. Indonesia’s age group demographic (2018) Figure 3.8. Comparison in e-money transaction (2019)
Figure 3.9. Southeast Asia’s digital financial services forecast (in
USD bn) 2018
10,701
2,509
Issuance of national payment
gateways (“NPG”)7 following by the
1,169 launch of NPG system in Dec 2017
340
90 30 93 20
2017
BCA Mandiri BNI BRI CIMB Niaga
No. of transactions (mn) Transaction value (IDR tn) Issuance of electronic payments
regulation, consisting of e-wallets
Source: OJK, Bank Indonesia, Company and payment gateways
2016
Grasping towards digitalization era: non-banking players are exploring opportunities in digital payments
Source: e-conomy SEA 2019
Aware of the lucrative market potential, it is worth highlighting that not only banking players, but also notable non-banking players
from various segments have ventured in the digital payments space. Some of the players have succeeded to become the prominent Figure 3.10. Indonesia fintech ecosystem Source: Bank Indonesia
players in the industry. Two of the prominent ones are Go-Pay and Ovo as the market leader in the industry, underpinned by 7 NPG: a unified and interconnected clearing network that unites all payment channels in
abundant resources and rapid technological advancement. Indonesia, including ATMs, POS, payment gateways and e-payment methods like credit and
debit cards 2Regulatory sandbox: A limited trial for Fintech players to ensure whether their
products, services, technology, and business model meet BI fintech criteria
Emergence of fintech players: Fintech overview

Fintech in Indonesia: gaining traction
In recent years, Indonesian fintech ecosystem continue to develop in an accelerated pace,

encompassing various business models across its value chain, with peer-to-peer (“P2P”) lending
and digital payments dominating the ecosystem.
Source: Fintech Singapore News, as of October 2019
SEA digital transaction: promising outlook ahead
Digital financial services in the SEA region are expected to grow in an accelerated pace in the future, growing at a strong double-
digit by each segment. Digital payments are forecasted to reach USD 1.1 tn (~IDR 17,697tn) by 2025, underpinned by fast-growing
internet economy and favourable demographics background.
Emergence of fintech players: Figure 3.12. Global alternative lending forecast
Emergence of fintech players: An unprecedented surge on P2P lending size
P2P lending Transaction value, in USD bn P2P lending The P2P lending has taken off well in the past few years. As
a financial services provided via online systems, P2P lending
Indonesia has a huge potential to be one of +13%
P2P lending: tapping the underbanked and offers the flexibility of obtaining loans without collateral and
365
the largest P2P lending market, underpinned 349 unbanked population approval speed as its key advantages compared to banks.
324 Started to emerge in 2016, P2P targets the unbanked and
by sizeable small medium enterprise (“SME”) 288 21%
21%
23% As the biggest contributor to the Indonesian underbanked population in Indonesia. The growth of P2P
ecosystem 243 24% lending has been skyrocketing over the four-years span, from
198 26% fintech ecosystem, P2P lending has been
merely IDR 0.3 bn loans disbursed in 2016 to IDR 81 tn in
Global alternative lending market is expected to book 28% booking an unprecedented surge on its size,
79% 79% 2019, with 144 registered and 25 licensed P2P lending players
continuous growth in the future 77%
74%
76% tapping the underbanked and unbanked granted by OJK.
72%
Alternative lending market is classified into two categories, population as their main target market. Does P2P lending disrupt the conventional banks?
which are crowdlending and marketplace lending.
Crowdlending, or lending-based crowdfunding, is a platform 2018 2019 2020 2021 2022 2023
Although there are potential overlaps between the P2P lending
Crowdlending Marketplace lending Figure 3.15. Growth in P2P lending
enabling SMEs to obtain loans from single or multiple private and conventional banks, as of now they have different target
institutional investors via an online brokering platform. market, where P2P players mainly target the customers
Source: Statista
Marketplace lending, or commonly referred as P2P lending, is a underserved by the formal banking system, i.e. the SME players
platform mainly offering borrowers to place loan requests in an Figure 3.13. China and Indonesia P2P market comparison (2019) which have limited assets for banks’ collateral requirements,
online marketplace in order to find the appropriate investors. lack of credit history and audited financial statements.
Globally, alternative lending market is highly dominated by Furthermore, banks still have a bigger scale compared to P2P,
crowdlending business, accounted for 72% in 2018. This trend In USD bn
14,330
as P2P loans only contributed c.1% to the industry’s MSME
71
is expected to continue in the future. loans. P2P lending is a fragmented market, as the prominent
players only contribute c.12% market share in the industry.
Indonesia has huge potential to grow P2P lending market
size, supported by large SME players In order to prevent any potential disruption, OJK has
encouraged P2P platforms to collaborate with banks as opposed
Compared to China, Indonesia’s P2P lending market is relatively 1,120
1 to compete with them, through issuing a regulation which
small. This situation is attributable to Indonesia P2P lending’s Source: OJK
requires every lender and borrower to have a bank account9.
late emergence in the country and different phases of market Indonesia China
Large banks could expand their target market, reaching the
cycle between Indonesia and China. Indonesia’s P2P lending Figure 3.16. P2P lending scale comparison (2019)
Total outstanding loans GDP underbanked and unbanked population. As such, some banks
market is at an expansion stage whereas China’s P2P lending
have collaborated with prominent P2P lending platforms
market has reached its peak and already at a mature stage. Source: OJK, Wang Dai Zhi Jia and disbursed loans through these platforms, i.e. Bank
Nonetheless, Indonesia’s P2P lending market has been rapidly
Mandiri collaborating with Amartha and Koinworks, and BCA
evolving since its emergence, as it has booked skyrocketing Figure 3.14. SME contribution to Indonesian GDP
collaborating with Modalku as a strategy to expand their MSME
growth for the past few years. This is supported by large
loans portfolio.
number of SME players in Indonesia, which are underserved
by the traditional banking system. It is worth mentioning that
42% 42% 43% 43% 43%
SME plays a significant role in the Indonesian economy, by Emergence of fintech players: digital
consistently contributing over 50% to the GDP over the past five
years. payment
Source: OJK
Of the total loans disbursed by banks, only 18.3% were granted 58% 58% 57% 57% 57% E-wallet and payment gateway keep blurring
to SMEs due to lack of sufficient financial reports. Aware of Figure 3.17. Prominent P2P players market share10 the industry boundaries
this large untapped potential, Indonesian P2P players utilize
this opportunities through revolutionizing and simplifying the 2014 2015 2016 2017 2018 Wide spectrum of digital payment ecosystem
conventional lending process. MSME8 Large enterprises
Digital payment ecosystem consists of wide spectrum of
Source: Ministry of SME and Cooperatives players, from niche payment platform, i.e. Sepulsa (100,000+
users) and PajakPay (10,000+ users), to the more integrated
ones, i.e. Gopay (50 mn+ users) and Ovo (10 mn+ users), and
including both front-end digital wallet (e-wallet) and back-end
payment processor (payment gateways).
Currently, digital payment ecosystem is highly fragmented.

Players are inevitable with high barrier to entry as regulators
Source: OJK, Company
8 MSME (“Micro, small, and medium enterprises”) are classified under the following criteria: are very selective in issuing licenses. As a multiple-sided
• Maximum net worth of 10 bn; and
platform with multiple stakeholders, the future state of the
• Maximum annual revenue of IDR 50 bn.
ecosystem will only retain the most powerful players with good
9 POJK 77/POJK.01/2016
10 Market share is calculated based on loan disbursement of latest publicly available data
strategic position in the ecosystem and naturally eliminate the Figure 3.18. Electronic money transaction value11
weaker ones with insignificant role. In IDR tn
Standardized system in digital payments
The growing trend has emerged in Indonesian digital payments

ecosystem. Two of the key drivers are growing acceptance from
both users and merchants. Bank Indonesia, as a regulatory
body, has also initiated QRIS policy in 2019, allowing one
access code to receive payments from multiple platforms with
using standard QR code. The standardization might benefit
both merchants and users, as it might reduce users acquisition
costs for merchants and ease users in switching from one app
Source: Bank Indonesia
to another. To align with the growing trend, key players are
urged to form a collaboration in the fast paced and dynamics
Figure 3.19. Indonesia’s Internet economy
ecosystem.
Gross Merchandise Value, in USD bn
Despite promising growth, several players are unable to
reach its tipping point
Rapid growth in electronic money adoption is a key driver in

growing trend of digital payment in Indonesia. Electronic money
transaction has been growing exponentially from 2015 to
2019, underpinned by Indonesia’s sizeable and growing internet
economy, the electronic money transaction is expected to grow
at c. 22% CAGR from 2019 to 2025. Despite the rapid growth
in the internet economy, several digital payment players are Source: E-conomy SEA 2019
unable to reach their milestone due to lack of ability to provide
optimal value add for users and merchants. Some players,
such as Jenius from Bank BTPN, Octo Mobile/Rekening Ponsel
from Bank CIMB and Sakuku of Bank BCA, could only reached
1 million+ downloads users on Google Playstore, while others
have lower tractions, for example, Yap! from Bank BNI has only
reached 150,000+ downloads.
Emergence of fintech players: How forced to seek collaboration and acquisition from financial a. Central Capital Ventura of BCA invests in GPN (national payment Case Study
institutions and non financial institutions. gateway), Wallex and Airwallex (digital payment network and
best the banks respond? processor), KlikAcc (P2P lending), as well as Impact Credit GoPay’s journey from a mere-platform to an
Banks can opt to develop, acquire, or collaborate with fintech Solutions and Julo Finance (P2P aggregator and channeling). ecosystem-orchestrator
Banks and fintechs: together reaping the
1. Develop: There has yet a strong case for banks in the Digital payment services initially arise as
benefits through seamless collaboration b. BRI Ventures invests in LinkAja (e-Wallet), as well as Investree
self-development of fintech. Jenius of BTPN might be the and TaniHub (P2P lending). payment service providers in specific payment
The industrial landscape is changing gradually towards a success story of BTPN, but it has not reached even one- segment. While players continuously emerge
digitalization era. Banks are expected to remain essential in tenth of Go-Pay number of users. Similar case happens for c. Mandiri Capital invests in Investree, Amartha, and KoinWorks their boundaries to wider use cases, only few
the financial ecosystem, nonetheless, an alliance with fintech Sakuku of BCA. Even a large bank as BCA, with enormous (P2P lending), Mekari, Cashlez (point-of-sales), Gojek and LinkAja are successful in building platforms with relevant
can provide significant benefit in order to reap the seamless capital, abundant talent and advanced technology, has not (e-Wallet). and sticky daily use cases. Taking a case study of
digital customer experience. As fintech players have grabbed succeeded in migrating its customer base to populate its GoPay, GoPay was initially purposed for Gojek’s
digital payment platform. 3. Collaborate: For banks who cannot bear the risk of losing investment
a gradually expanding market share in the ecosystem, it is riders in relation to payment of ride-hailing and
in a failing fintech, the most rational response is through a non-
expected that this trend will likely continue to grow in the food delivery services. Currently, GoJek has
2. Acquire: Leading banks have established corporate venture equity collaboration that can develop additional use cases, increase
future along with new technological innovations. Moreover, the leveraged its payment solution to its partnering
capital (“CVC”) that are focusing to invest in ﬁntech-related market share, and in turn strengthen its position in the ecosystem.
current global pandemic situation could potentially create new merchants in F&B and other lifestyle sectors. In
startups. Backed with sizeable capital support from the The collaboration might be structured in form of channeling of
opportunities for banks and fintech through collaboration, as addition, GoJek’s recent acquisitions of Midtrans
parent banks, these CVCs will be able to strategically spread institutional funding, cross-referencing with payment gateway,
the pandemic has forced physical distancing, thus accelerating can further leverage GoPay’s acceptance among
its investment in some portfolios that seems to be the next cash management and joint-promotion with e-wallet players, etc.
the cooperation between banks and fintech players to fulfill the e-commerce platforms.
leading players, including P2P lending and digital payment For instance, BCA collaborates with Gopay in cash management
rising needs of digitalization. As funding forces are weakening
platforms. For instance: area, while Mandiri collaborates with Amartha in channeling of
during the crises situation, a number of fintech firms may be
institutional funding.
11 Electronic money is defined as the value of money stored electronically in a medium such as server or chip.
Source: MDI Venture’s and Mandiri Sekuritas’ joint study “Mobile Payments in Indonesia: Race to Big Data Domination”
Regulator and Regulations
Through the implementation and the creation of PSP as

Regulatory environment Banking consolidation • Criteria for banks that need to be merged, acquire,
stipulated on the POJK. No. 41/POJK.03/2019 and 12/ takeover, and or integrate, are:
POJK.03/2020, the single presence policy term may be
Indonesian Banking is a highly regulated Banking consolidation aims at safeguarding • Banks which are facing financial difficulties and going
revoked, and PSP can own one or more than one bank in
industry with three main regulatory bodies public confidence during times of crisis Indonesia. Banks with a minimum core capital less than IDR 1 tn, concern issue; and
are required to prepare an action plan to fulfill the requirement
The Financial Services Authority/ Otoritas Jasa Keuangan In order to support the economic growth and national stability, • Banks of which controlling shareholders are not able
and need to submit the plan to OJK no later than 16 June 2020.
(“OJK”) is the principal regulator in Indonesian banking the Indonesian banking industry has been pushed to create to strengthen the banks.
industry. Since founded in December 2013, OJK has taken over more efficiency, stronger banking capitalization and more • Gradual Increase in commercial banks minimum Core
responsibility for bank licensing, regulation and supervision competitive dynamics to respond to the future challenges in Capital and minimum Capital Equivalency Maintained Assets
from Bank Indonesia (“BI”). the fast paced and dynamics banking ecosystem. Considering (“CEMA”) from branch office of a bank domiciled abroad • Criteria for banks that need to accept mergers,
the following aspects, on 26 December 2019, the Indonesian (“KCBLN”) to IDR 3tn by 2022 with the following timeline:
The Bank of Indonesia / Bank Indonesia, the central bank, is acquisitions, takeover and or integration, are:
Financial Services Authority (“OJK”), has released POJK
mainly responsible for monetary policy, regulating and ensuring No.41/POJK.03/2019 which revokes Peraturan Bank • Commercial banks or sharia commercial banks with a
a smooth payment system and maintaining stability of the Indonesia (“PBI”) No. 32/51/KEP/DIR/1999 dated 14 May Minimum Core Minimum
Deadline minimum risk rating of 3 after the transaction;
Indonesian rupiah (IDR). 1999 concerning on merger, consolidation, acquisition, Capital CEMA
integration and conversion of commercial banks. IDR 1 tn --*) 31 Dec 2020 • Rural banks that will be categorized as “healthy”
Indonesia Deposit Insurance Corporation (IDIC) or Lembaga
IDR 2 tn IDR 2 tn 31 Dec 2021 banks after the transaction; and
Penjamin Simpanan (“LPS”) is responsible to protect To align with the Indonesian banking industry ecosystem and
customers’ deposits, maintain public confidence in banking IDR 3 tn IDR 3 tn 31 Dec 2022 • Sharia rural banks with a minimum risk rating of 3
furnish the OJK strategic direction, on 17 March 2020, the
and minimize risk of moral hazard. All commercial banks in OJK has subsequently released POJK. No. 12/POJK.03/2020 after the transaction.
Indonesia must become members of the deposit insurance on the consolidation of the conventional banks. The initiative
system. The maximum deposit that is guaranteed for each bank from OJK aims at increasing stronger capitalization and Banking industry issues
customer is IDR 2 Bn. performances, increasing business scale and efficiency, Government stimulus in response
For the past three years, OJK has been outlining a series of increasing business competitiveness, and therefore contributing OJK to handle banking industry issues due to to Covid-19
significantly to the national economy.
reforms and institutional developments including issuing a the COVID-19 pandemic
new consolidation plan as part of their effort to strengthen the Multiple stimulus has been provided to mitigate
capital structure and competitiveness of the banking industry. In light of the COVID-19 pandemic, on 1 April and 20 April impact from Covid-19 outbreak
Specifically, OJK aims at financial services development to be The key principles in the POJK. No. 12/ POJK.03/ 2020 are as 2020, the President of Indonesia and OJK have issued
consistent with the country’s broader development goals for follows: Government Regulation in lieu of law or (“PERPU”) No.1 2020 OJK, Bank Indonesia, and Indonesia’s Government have issued
the real economy, and countercyclical policies which aim to and Peraturan Otoritas Jasa Keuangan (“POJK”) No. 18/ several financial stimulus to ease the burden of financial
smoothen the peaks and valleys of the economic cycle. Another • Controlling entity or Pemegang Saham Pengendali POJK.03/2020, respectively. services and other sectors, which are affected by the Covid-19.
major goal is to broaden and deepen capital markets to reduce (“PSP”) shall own 1 (one), or several banks through For banking sector, OJK has provided adjustments in relation to
consolidation scheme, as follows: The issuance of both regulations would provide flexibility for debtors who are facing difficulties in fulfilling obligations to the
reliance in bank lending.
OJK, as a financial authority with extra legal protection to take banks due to the Covid-19 (“affected debtors”). For instance,
• Consolidation, merger, or integration; extraordinary measures in protecting the economy. Through POJK. No. 11/POJK.03/2020 covers multiple aspects from
implementation of the PERPU and the new POJK, OJK was restructuring of outstanding loan, new loan disbursement, loan
• Takeover followed by consolidation, merger or
mandated to handle banking industry’s issues in order to create loss provision, to investment valuation.
integration;
financial and economic stability during this uncertain situation.
• Establishment of a Bank Business Groups or For instance, having mandated by the Government, OJK has full • Restructuring: Restructuring due to Covid-19 is provided
Kelompok Usaha Bersama (“KUB”) on the current authority to push and accelerate the consolidation by means of for debtors who were classified as performing loan – prior
ownership; mergers and acquisitions of Indonesian banks. to Covid-19 impacting business performance. It has a
maximum period of 12 months.
• Establishment of KUB due to separation of Sharia The key principles in the POJK. No. 18/POJK.03/2020 are as
Business Unit (“UUS”) ; or follows: • New loan: In case banks would provide new loan to
affected debtors, assessment is to be made separately.
• Establishment of KUB due to takeover. • OJK has the authority to give written orders to banks to i.e. based on punctuality of payment (for loan with credit
perform or accept mergers, acquisitions, takeover, and limit up to IDR 10 bn) and based on POJK. No. 40/
or integration plan. POJK.03/2019 (Asset Quality Assessment) for loan with
higher limit.
M&A Banking Transactions in Indonesia
Mergers, share acquisition and capital market transactions

More active M&A transactions In Indonesia in Several banks are currently contemplating to strengthen its
capital by mean of fundraising, either through rights issue
the last two years
or private placement. These corporate actions have been
In the last 5 years, there has been 29 successful M&A initiated by banks with readily available investors. For instance,
transactions in Indonesian banking market, with 19 transactions Bank Artos, Bank Yudha Bhakti, and Bank IBK Indonesia are
are majority deals (>50% stake acquired) and most transactions conducting rights issues following previous acquisition in 2019.
involving foreign buyers. The M&A activities in banking has Recently in 2020, Kasikornbank acquired 30% stake in Bank
become more active during 2019 and this trend is expected to Maspion. Meanwhile, Bank Kesejahteraan Ekonomi is in the
continue, following OJK’s plan to further reduce the number of process of 45.1% acquisition by PT Danadipa Artha Indonesia,
• Provision: Restructured loan due to Covid-19 can be categorized as Collect-1 (Performing Loan to 12 banks, recently issued banking consolidation regulation by OJK, prior to having its envisaged private placement at its 2nd stage
months Expected Credit Loss). However, banks need to record additional provision if the debtors cannot and weaker organic growth potential due to recent Covid-19 of corporate action.
recover after the restructuring period/the outbreak of COVID-19 is over. outbreak.
• Investment valuation: Banks are allowed to postpone the mark-to-market assessment for 6 months Figure 5.4. Recent banking transactions in Indonesia
(up to Sep20) for certain high-quality instruments, such as Government securities, securities issued
by Bank Indonesia, and other securities of well-performing issuers. During the postponement period, Total Reducing
Stake Transaction
banks can use the quoted price as of March 31, 2020 for mark to market purposes. No. Year Bank Acquirer
Acquired
Equity
P/BV (x)
no of
(USD mn) banks?
From the other side, Bank Indonesia - via press release No. 22/30/Dkom – has loosened minimum reserve 1 2020 PT Bank Maspion Tbk
KasikornVision Co Ltd
30.0% 85 n/a 
(subsidiary of Kasikornbank Plc Ltd)
requirement for the banks to provide additional liquidity. In the macroeconomic perspective, BI has also
2 2019 PT Bank Permata Tbk Bangkok Bank Plc Ltd 89.1% 1,538 1.6x 
issued new and higher requirements on macroprudential liquidity buffer and macroprudential intermediation
PT NTI Global Indonesia and
3 2019 PT Bank Maybank Syariah Indonesia 100.0% 43 n/a 
ratio to maintain the national financial stability. With these macroprudential policies, BI urges banks to PT Berkah Anugerah Abadi
purchase more instruments issued by Bank Indonesia such as Sertifikat Bank Indonesia (“SBI”) and Sertifikat 4 2019 PT Bank Yudha Bhakti PT Akulaku Silvrr Indonesia 8.9% n/a n/a 
5 2019 PT Bank BTPN Tbk Sumitomo Mitsui Banking Corporation 57.0% n/a n/a 
Berharga Negara (“SBN”).
6 2019 PT Bank Rabobank Int’l Indonesia1 PT Bank Central Asia Tbk 100.0% n/a n/a 
7 2019 PT Bank Artos Indonesia Tbk PT Metamorfosis Ekosistem Indonesia 51.0% 8 4.1x 
8 2019 PT Bank Danamon Indonesia Tbk MUFG Bank Ltd (“MUFG”)2 54.0% 2,828 2.3x 
Figure 4.1. Summary of incentives related to loan restructuring
9 2019 PT Bank Nusantara Parahyangan Tbk MUFG Bank Ltd (“MUFG”)2 92.1% 94 2.5x 
10 2019 PT Bank Nusantara Parahyangan Tbk PT Bank Danamon Indonesia Tbk 100.0% 94 1.2x 
11 2019 PT Bank Royal Indonesia PT Bank Central Asia Tbk 100.0% n/a n/a 
12 2019 PT Bank Sumitomo Mitsui Indonesia PT Bank BTPN Tbk 100.0% 643 1.0x 
13 2019 PT Bank Bukopin Tbk Kookmin Bank Co Ltd 22.0% 495 1.1x 
14 2019 PT Bank Mitraniaga Industrial Bank of Korea 71.7% 17 1.5x 
15 2019 PT Bank Agris Tbk Industrial Bank of Korea 95.8% 41 2.7x 
16 2018 PT Bank Danamon Indonesia Tbk MUFG Bank Ltd 20.1% 2,780 2.1x 
17 2018 PT Bank Danamon Indonesia Tbk MUFG Bank Ltd 19.9% 2,551 2.3x 
18 2017 PT Bank Dinar Tbk Apro Financial Co Ltd 77.8% 31 2.1x 
19 2017 PT Bank Andara Apro Financial Co Ltd 59.0% n/a n/a 
20 2016 PT Bank Mayapada International Tbk Cathay Financial Holding Co Ltd 15.1% 333 2.7x 
21 2016 PT Bank Windu Kentjana International China Construction Bank Corporation (“CCB”)3 60.0% n/a n/a 
22 2016 PT Bank Antar Daerah PT Bank Windu Kentjana International 100.0% n/a n/a 
23 2016 PT Bank Pundi Indonesia Tbk Banten province Government >50.0% n/a n/a 
24 2016 PT Bank Metro Express Shinhan Bank 58.0% n/a n/a 
25 2016 PT Centratama Nasional Bank Shinhan Bank 75.0% n/a n/a 
26 2015 PT Bank BPTN Tbk Sumitomo Corporation 17.5% 938 2.8x 
27 2015 PT Bank Mayapada International Tbk Cathay Financial Holding Co Ltd 24.9% 224 3.1x 
28 2015 PT Bank Bukopin Tbk Bosowa Corporindo 30.0% 496 1.6x 
Source: Mergermarket, News
1 Rabobank is closing down the business.

2 Vertical integration; MUFG acquired Bank Danamon, right after Bank Nusantara Parahyangan merged into Bank Danamon.
Source: OJK, Bank Indonesia, EY 3 Vertical integration; CCB was authorized by OJK to acquire Bank Windu, provided that Bank Windu acquiring another bank to be merged vertically.
Opportunity to invest in Indonesian
banking industry
Inorganic growth through acquiring or merging other bank will
Pursuing organic and inorganic growth Key rationales of investing Figure 6.1. Comparison of banking assets and 5-year CAGR
help banks to rapidly increase its scale and improve its ability In USD bn and in %
strategy for Banks to instantly extend geographic footprint and diversify sector in Indonesian banking industry
exposure. Additionally, it provides capabilities to capture new 1,000
Banking mergers, acquisitions and segments/products to strengthen competitive position and
Understanding the Indonesian banking potential 800
consolidation are inevitable trends increase market share. 600
Underpenetrated market, which has not changed significantly
945
Out of 96 conventional commercial banks in 2019, seven are In terms of performance, return of assets of large-size banks of in the last 5 years, will remain as key imperative to invest in 400
625
large-sized banks of BUKU 4 which hold 56.4% of banking BUKU 4 outperforms banks from BUKU 3, BUKU 2, and BUKU 1. Indonesian banking industry. In order to thrive in the industry, 200
324
assets and generate 61.9% of net interest income. From 2015 Large-sized banks gain a competitive advantage of scalability, investors and industry players should clearly identify where the
0
to 2019, number of banks are declining, specifically in small- both for its systematic and trustworthy core business and its potential lies and how to realize it. 2015 2016 2017 2018 2019
sized BUKU 1 banks, indicating an industry consolidation trend agile business development. This is based on their capability to Indonesia (9.1%) Singapore (4.0%)
All banks are granted with large industry size and potential
through M&A. Despite the high costs associated with the M&A possess a sizeable TPF and loan portfolio, as well as a better Malaysia (4.8%) Thailand (3.5%)
growth
process, pursuing inorganic growth strategy will help banks with talent deployment capability, which prepare them better to Philippines (11.0%)
smaller size to gain new product capabilities and access to wider tap the opportunities that arise. Moreover, larger-sized banks As one of the fastest growing economy and the highest GDP Source: BMI Research
market in a shorter time. are also valued more or higher than the smaller ones. As a in the region, Indonesia provides wide banking landscape with Source: BMI Research
proxy, trading price-to-book value multiple (“P/BV”) of top 4 moderate growth for banking players. For the past five years,
Injecting additional capital to pursue the organic growth will Figure 6.2. Comparison of loan-to-GDP
publicly listed banks exceeds those of the other top 10 banks in Indonesia’s banking assets have been growing among the
help small to medium-sized banks to boost their capital and In %
Indonesia (average P/BV of top 10 banks: 1.6x). In other words, highest in SEA countries at 9.1% CAGR. This growth is expected
expand their loan portfolios. Additional capital can also be
scale does matter in determining value of banks, thus smaller- to continue, underpinned by improvement in financial inclusion
used to extend branch footprints and diversify risk through
sized banks will probably drive future M&A trend as they are which will lead to the increase in banking penetration.
product and geographical expansion. However, developing new
pursuing the inorganic growth strategy.
product portfolios carries a considerably high failure risk and is Focus strategy can optimize banks’ return on capital
considered to be a time consuming process.
Figure 5.3. P/BV of top 10 publicly listed banks in Indonesia (x) Indonesia’s current loan-to-GDP ratio is stood at 37.5%, which
represents the existence of room for growth in the banking
Figure 5.2. Return on assets (%) industry. In spite of the vast growth opportunity, banking
players are better pursuing focus strategy to optimize its return.
3.5% Instead of competing with larger players, smaller banks could
3.3%
3.1% 3.2% 3.1% tailor their products and service offering based on certain niche
market that they are targeting and specialized with, in terms of
sector, market segment, and geographic location. Source: BMI Research
1.7 1.8%
1.7% 1.8% 1.7% Higher growth opportunity in certain regions Figure 6.3. GDRP contribution and deposits contribution
1.6%
1.4% 1.4%
1.3% 1.5 1.6% 1.5% 1.2 In % of national GDP and % of national deposits
1.4 Each province contributes different GDRP1 to the national
1.4 GDP. The gap between GDRP and deposits contribution in each
2015 2016 2017 2018 2019 region provides big opportunity for players to expand. For
BUKU 4 BUKU 3 BUKU 2 BUKU 1 Source: Bank Indonesia instance, with c.22% GDRP contribution, Sumatra contributes
only c. 11% of national deposits. Opportunity also comes from
Source: OJK plan to relocate Indonesia’s capital city to Kalimantan. The plan
would involve an investment of c. IDR 466 tn (USD 32.9 bn)
that would generate 2.3x output multiplier to the Indonesian
economy.
1 GDRP: Gross Domestic Regional Products
Source: BPS, OJK
Final Remarks: The future of Appendix
Indonesian banking industry
Indonesian banking industry should strive for excellence towards

digitalization era
Indonesian banking industry: Promising growth opportunity, despite growing at the new normal
Indonesian banking industry is expected to grow at a slower rate, compared to the previous period, with
BUKU 4 banks (and to certain extent, BUKU 3 banks) will continue dominating the industry. In response
to the slowing industry growth, banks should continuously strive to develop initiatives to maintain steady
growth, manage asset quality to reduce non-performing loan, and explore digital initiatives to improve
operational efficiency. Anticipating slower growth, OJK has also targeted to reduce the number of banks by
issuing minimum core capital requirement of IDR 3 tr by 2022 that will probably urge most banks to pursue
inorganic growth strategy.
Strong foundations for banks to reach its growth strategy: profitable scale, good positioning, and a proper
digitalization strategy
To thrive in the industry, banks need to focus on the following:
1. Operating at profitable scale: In order to maintain competitiveness, banks need to reach an optimal
scale, where they can operate profitably. As a means to reach this, banks can pursue M&A initiatives,
whereby shared technology and best practices would also be leveraged to create meaningful
synergies.
2. Targeting a niche area, market segment, and products: Banks need to obtain an in-depth
understanding on their target market, including a specific sector knowledge and expertise in certain
market segments. As an example, Bank Mestika Dharma, a Sumatra-based BUKU 2 bank, distributes c.
52% of its loan to agriculture, processing, wholesale market and c. 18% to households in Sumatra. In
maintaining its asset quality, the bank customized its credit scoring and review system to adjust with
its regional base. Branches geographical position are also focused to cater their market segment1).
3. proper digitalization strategy; It is inevitable that banks should adopt digitalization in their strategy
and offering going forward. Then, the key is for the banks to have a proper digital strategy. For
instance, it was previously deemed effective for the larger banks to self-develop a digital platform, as
they have abundant resources (capital, human resources and technology). However, few cases of self-
developed digital platform, indicated that it might not be the most optimal route for leading banks to
create successful digital platform. For smaller banks, in this case, it might be more suitable for them
to collaborate with the disruptive financial technology players to grow and increase the market share
together, as opposed to compete with them.
Page 30 | Indonesian banking industry: Maintaining resilience amidst the headwinds

Appendix - 1 (Regulations) Appendix - 2 (Regulations)
Limitation on banking ownership Permitted activities and networking
In 2012, BI issued regulation PBI No. 14/8/PBI/2012, which affected investment in the Indonesian banking OJK issued Peraturan Otoritas Jasa Keuangan (“POJK”) No. 17/POJK.03/2018 which amends POJK.
industry. The regulation introduced limitations on banking ownership, permitted activities and office No. 6/POJK.03/2016 on classification of commercial banks based on core capital, known as BUKU, and
networks. stipulates permitted activities and networking areas for each of the classifications. This regulation is the
updated version of the previous BI Regulation PBI No. 14/26/PBI/2012. However, since the implementation
The regulation stipulates the maximum ownership in an Indonesian bank based on the type of investor. of the latest POJK. No. 12/ POJK.03/ 2020, banks with core capital below IDR 1tn will be required to top-up
Furthermore, the ownership cap is applicable on a single-party basis, meaning that each single party must their additional core capital to IDR 1tn by 31 December 2020, and gradually increase to IDR 3 tn by end of
comply with the cap individually. A single party may comprise multiple individuals or entities and is defined 2022, and therefore would revoke the bank grouping category based on the existing requirements.
as follows:
Figure 4.3. Bank grouping by Tier-1 capital
• Individuals or entities for which there is an ownership relation
Category Tier-1 capital requirement (in IDR) Tier-1capital requirement (in US$)*
• Individuals or entities that are acting in concert
BUKU 1* 100 billion to 1 trillion 7.7 million to 77 million
• Individuals for which there is a family relation up to the second degree; for example, adopted siblings,
BUKU 2* 1 trillion to 5 trillion 77 million to 385 million
father- or mother-in-law, etc.
BUKU 3 5 trillion to 30 trillion 385 million to 2,308 million
Figure 4.2. Ownership limitation based on type of investor BUKU 4 > 30 trillion > 2,308 million
Ownership limitation based on type of investor Ownership limitation Source: OJK
Bank >= 40% Figure 4.4. Matrix of permitted activities

Allowed to invest for a long period of time
Supervised by financial authorities 40% No. Activities BUKU 1 BUKU 2 BUKU 3 BUKU 4
Nonbank financial Funding activities
Example: multi-finance, insurance or pension fund
institution
Nonbank financial institution that does not fulfill the above criteria Time deposits, saving accounts, certificate deposits,
1 Δ   
30% borrowings and/or debt issuance
Example: special purpose vehicle (SPV), managed fund or hedge fund
2 Asset securitization x   
Non-financial institution 30% Funding activities
Sharia bank 25% Loans, factoring, purchase of Government bonds,
Individual 3 Δ   
placement in BU and/or placement in other banks
shareholder Non-Sharia bank 20%
Purchase of corporate shares and bonds, and acting
4 x   
as lead arranger for syndicated loans
Source: Bank Indonesia Trade finance activities
5 Domestic letter of credit Δ   
Foreign investors can establish a commercial bank only in a JV with a local partner. The maximum foreign
6 Letter of credit and other trade financing activities x   
ownership in a commercial bank is 99% of the bank’s paid-up capital. Holdings by financial institutions are
Treasury activities
limited to 40%, and for non-financial institutions the limit is 30%. Simple and/or complex derivative transactions (i.e.,
7 x   
structured products and credit derivatives)
However, What we see in the market is that the OJK may give approval for a bank to have more than 40%
Foreign currency dealer activities
ownership under certain conditions, such as its composite rating of one or two, meeting certain capital 8 Foreign currency dealer    
adequacy ratios, a minimum Tier-1 capital of 8% and a commitment to the development of the Indonesian Selling agent and working agreement with other party’s or parties’ activities
economy. As an example, Shinhan Bank needed to acquire two banks, which were a 98% stake of Bank Metro 9 Foreign currency dealer Δ   
Express and a 75% stake of Bank CNB (“Centratama Nasional Bank”), then merged them to become Shinhan Sales agent for mutual funds, Government bonds
Bank Indonesia. and Government Sharia bonds, custodian, trustee,
10 x   
trust and/or bancassurance with distribution
business model
Shareholders that own more than the maximum thresholds, outlined in Figure 14, must comply with some
Payment system and electronic banking activities
requirements. For example, if the banks in which they invest obtain a good corporate governance (“GCG”)
Fund transfer, clearing, settlement, ATM, debit card
rating, above level 2 three times in a row, the respective shareholders will be required to divest their 11 Δ   
and e-money
investments within five years. 12 Credit card issuance and internet banking x   
Payment system and electronic banking activities
13 Bank guarantee and safe deposit box Δ   
Source: OJK
Appendix - 2 (Regulations) Appendix - 3 (Regulations)
Permitted activities and networking Peer-to-peer lending
Figure 4.5. Matrix of permitted maximum equity participation in financial institutions Development of financial-technology (fintech) companies in peer to peer (P2P) lending sector has
encouraged OJK and Bank Indonesia to cater and supervise P2P platform players in the interest of greater
BUKU BUKU BUKU BUKU
No. Activities transparency. OJK has also encouraged Indonesian P2P platforms to collaborate with banks to support the
1 2 3 4
development of economy. It is further regulated in the Peraturan Otoritas Jasa Keuangan (“POJK”) 77/
Maximum equity participation in financial institutions
POJK.01/2016 that every P2P platform is required to have minimum capital of IDR 1 bn and further to gain
As a percentage of total capital (core
1 – 15% 25% 35% a license the minimum capital requirement is IDR 2,5 bn. Nevertheless, lenders and borrowers are required
and supplementary capital)
Locations for equity participation in financial institutions to have bank accounts, with the exception of group lending.
2 Located within Indonesia    
3 Located within Asia X X   Furthermore, other initiatives to support the sector in Indonesia by the regulators are including the setting
4 Located worldwide X X   up of the fintech office, the launch of the National Payment Gateway, and the establishment of the fintech
regulatory body to supervise current 73 P2P lending services registered with OJK.
Legend:
X = Not permitted
 = Permitted List of Peraturan Bank Indonesia (“PBI”) regulation and POJK for fintech industry:
Source: OJK
• POJK. No. 77/POJK.01/2016 regarding the information technology based lending services or
Figure 4.6. Permitted location for office network expansion
layanan pinjam meminjam uang berbasis teknologi informasi (“LPMUBTI”). The regulation aims at
supporting the growth of the LPMUBTI industry or fintech peer to Peer (P2P) Lending platforms, as
BUKU BUKU BUKU BUKU
No. Activities
1 2 3 4
new financing alternatives for communities that have yet to enjoy optimal services from conventional
financial services industries, including banks, capital market, financing companies, and venture capital
Location for office network expansion
firms.
1 Expansion within Indonesia    
2 Expansion within Asia X X  
3 Expansion worldwide X X X 
Legend: • PBI No. 18/40/PBI/2016 regarding provision of payment transaction processing or Penyelenggaraan
X = Not permitted
 = Permitted pemrosesan transaksi Pembayaran (PTP). the regulation recognizes providers of payment gateway and
Source: OJK
e-wallet services, among others, as Payment System Service Providers (Penyelenggara Jasa Sistem
Pembayaran—”Service Providers”) in Indonesia, licensing, approval and reporting requirements apply
Figure 4.7. Minimum loan to productive sector requirements
to these services.
BUKU BUKU BUKU BUKU

No. Activities
1 2 3 4
Minimum loan to productive sector • PBI Nomor 19/12/PBI/2017 regarding the financial technology implementation or penyelenggaraan
Minimum loan amount (as a percentage of total teknologi finansial. The regulation aims at encouraging innovations and supporting the establishment
1 55% 60% 65% 70%
loan) of financial technology ecosystem to be useful to the economy, by observing the principles of
Source: OJK consumer protection, risk management, and prudence. The regulation focus on arrangement,
supervision, and monitoring of the platform.
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Indonesian banking

Opportunities to invest in Indonesian banks 29

Consolidation trend in the banking sector Merger of: Key players

Industry growth Figure 2.7. Loans market share

BUKU 3 and BUKU 4 banks are still

Indonesian banking industry is

25% 21% cycle

Entering the credit easing cycle

Back in 2018, BI has implemented tightening monetary

by 100 bps to 5% as of December 2019. Furthermore, 5.39%

maintain the dovish stance in order to withstand the

outperform smaller players Flattish NIM outlook

retail trade industry, followed by processing industry, as this is

Compared to other Southeast Asian countries, Indonesia’s

requirements due to the COVID-19 pandemic, more loans are

2015 2.49% In the past 5 years, Indonesian banks have

Moving towards digital banking: internet banking dominating

Aware of the huge potential offered by the digitalization, many

Going forward, it is expected that mobile banking will dominate

Figure 3.3. Indonesia’s internet user and penetration 3% market share

Stepping into the digitalization era: big BTPN BTPN Sinaya

Leading banking players in Indonesia have managed to utilize

Indonesian fintech ecosystem encompasses various business

Emergence of fintech players: Fintech overview

In recent years, Indonesian fintech ecosystem continue to develop in an accelerated pace,

SEA digital transaction: promising outlook ahead

Currently, digital payment ecosystem is highly fragmented.

Standardized system in digital payments

The growing trend has emerged in Indonesian digital payments

Rapid growth in electronic money adoption is a key driver in

Through the implementation and the creation of PSP as

Mergers, share acquisition and capital market transactions

1 Rabobank is closing down the business.

1 GDRP: Gross Domestic Regional Products

Source: BPS, OJK

Indonesian banking industry should strive for excellence towards

To thrive in the industry, banks need to focus on the following:

Page 30 | Indonesian banking industry: Maintaining resilience amidst the headwinds

Ownership limitation based on type of investor Ownership limitation Source: OJK

Bank >= 40% Figure 4.4. Matrix of permitted activities

BUKU BUKU BUKU BUKU

EY is a global leader in assurance, tax, transaction and

promises to all of our stakeholders. In so doing, we play

©2020 PT Ernst & Young Indonesia.

APAC No. 00000442

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