SECTOR FOCUS│ 8 Mar, 2021

Indonesian Banks
OVERWEIGHT
Digital banks on the horizon
Improving financial inclusion and creating novelty in intermediation
Digital currency has become a big topic in banking and central bank. Currently, Bank
Indonesia starts to study and build the Central Bank Digital Currency (CBDC). Several
studies indicate that monetary transmission could be better under a digital
environment, lower the overall transaction cost and create a better matrix on credit.
In this prospective environment, Digital Banks will be the main agents in this growing
digital-based economy.

Momentum moving towards digital banks

We classify the ongoing trend into two: 1) the digital banking services introduced by
the existing commercial banks (including BBCA, BMRI, BBRI, BNGA, BNLI, etc.), and
2) the fully digital financial institutions established after the consolidation with smaller
commercial banks, which are well-known as digital banks (Bank Jago-Gojek, BKE-
Shopee). Smaller banks, including ARTO, BBYB, BNBA, BINA, BBHI, BGTG up
172%/128%/778%/116%/468%/257% YTD due to the rising acquisition speculations Rifina Rahisa
as market foresees the aim of transforming it into a digital bank according to the trend rifina.rahisa@trimegah.com
#2. Most of the banks that rallied (excluding ARTO and AGRO) are those with core 021 – 2924 9103
capital and equity size of <IDR3tn and <IDR2tn, respectively, whereas banks’
minimum core capital requirement would be IDR3tn by 2022-end. Fakhrul Fulvian
fakhrul.fulvian@trimegah.com
021 - 2924 9097
What does the future of the digital banking era look like?
In addition to the consolidation trend mentioned previously, we think there are at least
Willinoy Sitorus
another five trends in the digital banking era: 1) Trend #1: emergence of digital
willinoy.sitorus@trimegah.com
ecosystem – we think digital banks’ lofty valuation can be justified by the vast digital 021 - 2924 9107
ecosystem, allowing them to offer a broader and more diverse financial products, 2)
Trend #2: overhauling banks’ credit scoring model – given the new credit scoring
involving the data of users’ digital footprints, we expect future digital banks to be better
at predicting default risk, 3) Trend #3: optimising back-end processes, although
Sector Performance (JAKFIN, %)
it may take time to achieve the optimal cost-to-income (CIR) level, 4) Trend #4:
more lifestyle and financial management product innovations – we expect this YTD 1m 3m 12m
will boost digital banks’ fee-based income in the medium term, 5) Trend #5: serving
Absolute 11.8 5.9 12.1 20.8
the unserved and underserved – with better risk pricing capability and more
efficient service cost, we expect digital banks can tackle the financing gap. Relative
to JCI 7.3 5.3 7.0 7.2

Are the existing big commercial banks prepared for the new age? Relative
11.2 7.7 11.4 14.8
Over the past several years, big commercial banks (BBRI, BBNI, BMRI, BBCA, BNGA, to LQ45
BNLI, etc.) have been on their digital journey, including partnering with the e- Source: Bloomberg, Trimegah Research
commerce, ride hailing, fintech, and other digital platforms via open banking services.
Given the sizable remaining chunk in the digital ecosystem and digital banks’ focus on
their own segment, we expect a limited impact to the big commercial banks in the
near-medium term. Note that should we look at the valuation of China’s big banks vs
Tencent as well as Korean’s big banks vs Kakao, digital bank disruption does not seem
to have a devastating impact on the big banks’ valuation (see page 14).

Companies Data
TP Shr. Pr. Ups.(dn.) EPS gr. (%) ROE (%) PBV (x)
Rec.
(IDR/sh) (IDR/sh) (%) 2021F 2022F 2021F 2022F 2021F 2022F
BBNI Buy 7,700 6,000 28.3 229.1 63.5 9.3 13.6 1.0 0.9
BBRI Buy 4,900 4,730 3.6 70.1 28.5 14.9 17.4 2.7 2.5
BMRI Buy 7,600 6,425 18.3 41.6 38.4 11.7 14.6 1.5 1.3
BBCA Neutral 38,000 33,600 13.1 20.7 18.1 16.2 17.2 4.1 3.7
PNBN Buy 1,400 1,095 27.9 11.0 15.3 7.0 7.5 0.6 0.5
BBTN Buy 2,300 2,150 7.0 655.0 45.9 8.0 10.9 1.1 1.1
BDMN Buy 3,300 3,130 5.4 (75.3) 230.4 2.3 7.3 0.7 0.7

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Investment Thesis
Digitalization providing upside both from macroeconomy and commercial side in digital business. BI recently stated
intention to build IDR digital currency. Introduction of digital currency should enhance the effectiveness of monetary policy,
while at the same time improve liquidity profile in the banking system. This trend should enhance the monetary policy
effectiveness and improve intermediation through the use of digital footprint. This technology should unleash potential growth
in Indonesia and improve financial inclusion.

The new-age of digital banks

2021 is expected to become a year for the digital banking in Indonesia. Looking at what is going on in the industry, we classify
the trend of the digital banking into two types: 1) the digital banking services introduced by the existing commercial banks
(including BBCA, BMRI, BBRI, BNGA, BNLI, etc.), and 2) the fully digital financial institutions established after the consolidation
with smaller commercial banks, which are well-known as digital banks (Bank Jago-Gojek, BKE-Shopee). The formation of these
digital banks is likely to involve acquiring smaller banks and collaborating with other lifestyle digital platforms (including ride
hailing, e-commerce, etc.) as the start of a new way to offer financial services.

Emerging ecosystem is the critical factor in valuation

Global digital banks which offer a relatively high premium compared to its peers have more established ecosystem with a
broader and more diverse product offering through its super-app, such as investment brokerage services, insurance products,
travel products, and a number of lifestyle services including restaurants, taxis, cinema tickets, concerts, in addition to the
primary banking products. We think the emerging ecosystem is the key to examine how Indonesian newer players’ valuation
will eventually look like as they mature. The tipping point for customers will come when the digital banks offer more portfolio
of products and services that traditional banks can today, such as financial management features (including financial planner,
goal savings, etc.).

Digital banks’ credit scoring should result in better credit quality outlook
One of the digital banking revolutions is SME risk assessment occurs online, with a technology platform records data about
users’ digital footprints. We expect future digital banks to be better at predicting default risk, for at least three reasons: 1) the
credit scoring models include online behavioural indicators, such as online consumption pattern, etc., which are more relevant,
2) they use more real-time transaction data – including on cash flows and the business environment – instead of far less up-
to-date financial indicators, 3) capture business players’ financial record that lack access to services in the formal financial
sector.

Optimal CIR level may not be achieved in the near-medium term

Kakao Bank’s cost-to-income ratio (CIR) still hovers at an elevated level after 3 years of operations, while WeBank’s CIR stood
at ~35% after 5 years, with the highest expenditures for research and development (R&D)-related. Note that both WeBank
and Kakao Bank have no physical branches or outlets. Hence, it will take time for digital banks to get a desired scale and it
may take time to achieve the optimal cost-to-income (CIR) level, in our view.

Limited impact for the existing big commercial banks in the near-medium term
Commercial banks, especially BBRI, BBNI, BMRI and BBCA, have partnered up as well with the e-commerce, ride hailing,
fintech, and other digital platforms (including Tokopedia, Shopee, Gojek, Grab, etc.) through open banking application
programming interface (API) services, creating huge ecosystem and allowing them to directly apply for loans. As the untapped
chunk in digital ecosystem remains sizeable and digital banks’ focus on their own segment, we expect a limited impact to the
big commercial banks in the near-medium term. The other hand, BBCA has been trading at relatively higher premium compared
to the other peers (BBCA/BBRI/BMRI/BBNI 2021F PBV is 4.1/2.7/1.5/1x) due to its rich CASA franchise. We think retail
customers may shift their amount of deposit materially when the digital banks can provide one-stop lifestyle and financial
solutions. Hence, risk of de-rating in the long-run is plausible for BBCA, in our view.

Key risks
Infrastructure Risk
Digital banking and economic digitalization should increase dependency of financial system into internet, IT infrastructure and
electrification. Absence of infrastructure should diminish efficacy of overall financial system.

Cyber and data management risk

Digital banking is more prone to attacks from cybercriminals.

Third-party management risk

Digital banks are likely to heavily rely on collaboration with third-party such as fintech players, e-commerce, and other firms
or platforms with each party carries risk of underperformance.

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 Digitalization on money to change the financial system
Digitalization in the economy. With the advancement of technology and science around the world, digitalization in many
aspects of human life is inevitable. The monetary system, as one the most important aspects in the economy, has also been
experiencing digitalization in many forms such as the emergence of digital payment apps, mobile banking system, digital
currency (crypto) and many more. The most recent form of digitalization that we are ought to face is the establishment of the
digital banks, which will be discussed in later part of this report. Nevertheless, we see that digitalization in the banking system
is not the only development that will take place in the near future – our monetary authority have also stated that it will also
take part in the digitalization process by issuing the so-called “Central Bank Digital Currency” (CBDC), which has been
implemented in China since mid-2020.

Before we discuss about the CBDC, we should first understand the nature of money. Money, which has been
introduced to the human civilization millenniums ago, can be simply defined as a financial instrument with several traits such
as: 1) it is a generally accepted medium of exchange, which can be used for transactional purpose, 2) it can serve as a store
of value, and 3) it can be used to measure the value of goods/services in the economy accurately (unit of account). Briefly
said, what we know as “fiat money” today is the byproduct of the previous forms of money evolution (commodity/commodity-
backed money). Unlike the commodity/commodity-backed money, fiat money, which is issued by the government, is not
pegged directly to commodities, yet still valuable as the money itself is backed by the government and people trust the
“paper” enough to make a transaction with it.

Figure 1. Taxonomy of Money

Source: Bank for International Settlements

what exactly is a CBDC? Just like the fiat money that we know and use today, a CBDC is also universally accessible, will serve
as a legal tender for all transactions in the economy, and is issued by the central bank but in a digital form rather than physical
(ie. banknotes, coin). The difference between the CBDC and other digital currencies, such as BTC or Ethereum, lies in the issuer
of the currency and the characteristics (unregulated, volatility) of these cryptocurrencies that reduced their ability to be used as
a medium of exchange. To provide better illustration on where is the positioning of CBDC in the currency classification, please
see (fig. 1). The concept of CBDC itself might be clear enough to be understood, yet, the plan on how it will be realized and
implemented in the economy is still up in the air. Will the CBDC replace cash? Or will it compliment the use of physical cash?
How the intermediary function of commercial banks will be affected by the emergence of CBDC?

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What are the possible reasons that can make CBDC become interesting?
Knowing the fact that we are heading towards cashless society, we think that a lot of people might want to shift to the CBDC
for it is a legal tender issued by central bank and has the same traits with the current fiat money such as medium of exchange,
store of value, and stable unit of account (except it is in a digital form). The shift to the digital currency is deemed more efficient,
convenient, and practical for people nowadays as it only requires the availability of mobile device to carry out the transaction.
It might also lead to lower crime rates as theft, robbery and money counterfeiting might vanish due to cash nonexistence.
Moreover, what we think will be the main reason for people to shift their traditional bank account money/deposit to CDBC is the
fact that the CDBC is equivalent to the current legal tender while bank account money is technically the commercial banks’
promise to provide a physical dollar upon our request. In a way, we only have promise rather than money if the banks go
bankrupt – CDBC holder will not be exposed with commercial banks’ solvency issue. Nevertheless, despite of these factors, we
are still uncertain if people want to entirely shift to CBDC since the concern regarding privacy and security matter might arise
(all transactions will be recorded and traceable). Going ahead, we think that the central banks’ effort in gaining people’s trust
will play a great role in determining the wide usage of CBDC.

For Central Banks: Central banks might want to issue CBDC because of several things: 1) to increase the payment system
efficiency, 2) provide a digital legal tender for transaction to maintain central banks’ role in the payment system (businesses
might prefer non-cash transaction in the future and thus CB’s role would weaken if physical money became irrelevant), 3) to
increase the financial inclusion for those with limited access to physical banks, 4) to improve the surveillance function which
would prevent and trace illegal/crime-related transaction, money laundering, as well as tax evasion, 5) to remained its
monopolistic role in “legal” money issuance and counter the challenge from privately issued digital money, as well as 6) to
maintain the currency competitiveness vs foreign currencies.

How can the emergence of CBDC impact the current monetary system?

1. Fractional Reserve System: Currently, the monetary system is implementing the fractional reserve system. To simply
put, the fractional reserve system allows commercial banks to only keep fraction of the total deposit they receive as the minimum
reserves, so that these banks can provide loan for those who needed. The emergence of the CBDC might lead to lower deposit
in the commercial banks if people shift their bank account money to CBDC, which will expand the balance sheet of the central
bank rather than these commercial banks. On the other hand, it will shrink the size of the commercial banks’ balance sheet,
which in turn will required banks to find new source of funding (typically more expensive as deposit is the cheapest source of
fund for banks) should they desire to maintain their loan provision. Figure 2 and 3 provide the illustration on how CBDC might
affect the fractional reserve system. The problem that needs to be addressed by the central bank is if the wider community
simultaneously moves their money from a savings account to CDBC as it might lead to liquidity problem in the banking system.

Figure 2. Before CBDC Figure 3. After CBDC

Commercial Private Commercial Private

Central bank Central bank
banks sector banks sector

Assets
(loans to Cash Cash Equity, Cash Cash
M0 Assets
bank, gov. bonds,…
bonds) Reserves Reserves (loans to Equity,
M0
bank, gov. CBDC CBDC bonds,…
M1 bonds) M1
Sight Sight
deposits Reserves Reserves
Loans deposits Loans Sight Sight
deposits deposits
Loans Loans

Source: Kiel Institute for the World Economy, Trimegah Research Source: Kiel Institute for the World Economy, Trimegah Research

2. Money supply structure: Understanding what happen to the fractional reserve system bring us to another conclusion –
some structural change in the money supply might happen. We know that our broad money supply (M2) is consists of M1 and
Quasi Money. The question is, “with the issuance of CBDC, will there be a new account to classify the CBDC?”. According to
figure 3, if we assume that CBDC will be classified as M0, there is a possibility that people’s decision to hold CBDC instead of
the commercial banks deposit (bank account money) will deflate the amount of quasi money and inflate the amount of M0.
Choice of the CBDC system will determine the money supply structure going ahead.

3. Inflation and monetary policy: As we all know, in current common practice, central bank uses the inflation targeting
framework in setting the monetary policy. Simply said, the monetary authority will observe the inflation level in deciding the
appropriate level of the benchmark interest rate to maintain the stability of price level. In some cases, inflation can become a
proxy of the domestic demand. Some study already indicate that through replacement of cash to CBDC could possibly increase
the effectiveness of the authority’s maneuver and improve the monetary policy transmission.

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 4. Lower utilization of cash: There are two scenarios where cash could be entirely replaced by the CBDC; 1) through
implementation of regulation, and 2) through voluntary people’s or other financial institutions’ decision to shift to the digital
currency. The fact that it might happen in the future bring a new question to our mind; “if cash being replaced by CBDC and the
CBDC directly held by the central bank, how would it impact the intermediation role of commercial banks?”. It is also interesting
to eye on how the credit/loan will be channeled in the future since the central bank does not provide loan for the private sector.
Thus, the role of CBDC in the economy, whether as a complementary to cash or replacement to cash, is an important thing to
be observed as it determines the direction of the monetary system going ahead.

Another model of CBDC issuance. The impact that we have discussed above might be materialized if the central bank
decided to issue the most basic type of CBDC which is the “direct CBDC”. As we have stated, the direct CBDC model will create
major disruptions in the financial system, because individuals, merchants and corporations can have direct accounts at the
central bank, so all transactions will be carried out through the central bank. This of course will impact the intermediation role
of the existing commercial banks (impact 1) as well as the current central bank role which only handles transactions between
commercial banks. However, this is not the only model that can be adopted by BI. There are two other models that can be
issued, namely:

1. Indirect CBDC: there will be no major changes in the role of the central bank. The indirect CBCD model is almost the same
as the current financial system. Financial transactions are carried out through intermediaries (in this case commercial banks).
Thus, the central bank will only releases CBDC and distributes it to the commercial banks. Commercial banks will continue to
carry out the role of “Know Your Customer”, verification, and payment of transactions for CBDC users. Given the high similarity
to the current financial system, the threat posed to commercial banks is the smallest, but might be considered unattractive.

2. Hybrid CBDC: The hybrid model combines the direct and indirect CDBC model – PboC’s CDBC, the e-CNY, is the example
of this CBDC model. In this hybrid model, CBDC holders have a direct claim to the central bank, which means that the holders
have their account directly at the central bank, just like the direct CBDC model. Nevertheless, it also adopts the indirect model
in a way that "Know Your Customer" and all payment processes will still be carried out by the commercial banks. By combining
the direct and indirect model, the hybrid model is predicted to cause less disruption in the current financial system, especially
for the commercial banks. Therefore, it is more rational and practical for banks to issue the hybrid CBDC model in today’s
condition rather than forcing the direct CDBC model or making too little changes by issuing indirect CDBC model.

Baumol-Tobin money management model to be less relevant as cost of holding money close to zero. This model
mainly discusses the tradeoff between having liquidity and the opportunity cost of interest forgone by holding the non-interest
bearing/physical money. In other words, the model helps us to better understand the cost and benefits of holding money and
therefore, this model can be used to determine the level of narrow money that should be hold and exchanged/deposited to
interest bearing asset so that we can better manage the cash level. Therefore, the key variables of the money management
model are then the nominal interest rate, the income level, the number of desired transactions per period, and the fixed
transaction costs of exchanging liquid money to interest-bearing assets (ie. savings deposit). However, the concept would
become obsolete with the appearance of digital banking and CBDC, which will make the fixed transaction costs becoming zero.
With the fixed transaction cost becoming zero, people will not need to forgo any interest rate in exchange for liquidity and
practicality.

Key Focus on Credit side: Credit Scoring Using Digital Footprint to improve assymetric information between
borrower and lender,

While benefit from the funding site is clear, credit side of the digital banking is an important thing to watch. To
make digital banking becoming a clear investment preposition. Study from Frankfurt school of management in 2018 indicated
that the number one benefit of digital banking is on the utilization of digital footprint. The research indicated that, combination
between conventional credit bureau scoring and digital footprint is likely to improve the quality of credit decision.

Digital footprint to bring access to the unbanked. Some study also suggest that digital footprint to bring better
understanding on the credit profile of small to medium enterprise (SME). Through the big data, we could separate between the
good entity and bad entity among the SME’s.

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Emerging trends in digital banking
The new-age of digital banks…
After the period of banking digitization for the past several years, 2021 is expected to become a year for the digital banking
in Indonesia which can push the country’s financial inclusion. Back to the origin, digital bank or neo bank is defined as a bank
that operates online-based services without a physical branch office. The concept, however, is not a brand-new trend in
Indonesia as previously, we are already familiar with digital banking transformation including BTPN’s Jenius (launched in 2016)
as well as DBS Indonesia’s Digibank (launched in 2017). Recently, tech companies are also competing to introduce their digital
banks in Indonesia and some of which are expected to be launched this year.

Looking at what is going on in the industry, we classify the trend of the digital banking into two types: 1) the digital banking
services introduced by the existing commercial banks, including the two aforementioned apps, Jenius and Digibank, as well as
digital banking services provided by bigger commercial banks such as BBCA, BMRI, BBRI, BNGA, BNLI, etc., and 2) the fully
digital financial institutions established by companies after the consolidation with smaller commercial banks, typically, which
are well-known as digital banks or neo banks. Digital-only banks will likely be targeting a younger, more digitally savvy
customers.

… driven by the accelerated use of digital ecosystem

The pull factors for digital banks’ investors are aplenty, such as high mobile penetration, sizeable young population and the
underbanked, as well as high economic activity using digital technologies. In 2020, Indonesia clinched the position of the
largest internet economy in ASEAN and according to Google, Temasek, and Bain & Co, the Gross Merchandise Value is expected
to grow remarkably to USD124bn in 2025, which indicates that the digital transaction will grow remarkably and fetches
Indonesia to be #1 compared to the neighbouring countries. Increasing internet users and mobile phone penetration
contributed to the digital payment increasing traction. Going forward, smartphone users can leapfrog into the digital ecosystem
as the room for banking penetration remains ample (Indonesia financial literacy stood at 76%, according to OJK survey in
2019).

Figure 4. SEA Internet Economy GMV (in USD bn) Figure 5. Annual transaction value per user in selected digital
platforms

Annual transaction value per user

2500000 180

160
153
2000000 140 140

120
1500000 110
100
90 90
80
1000000
60

500000 40 40
35
20

0 0
Bukalapak Shopee Tokopedia Gojek OVO Dana LinkAja

Annual Transaction per User (IDR, LHS) No of active users (mn, RHS)

Source: Google, Temasek, and Bain & Co, Trimegah Research Source: Companies, Various News Sources, Trimegah Research

Trend #1: Impending banking-tech consolidations; who’s next?

As the industry is on the early stage, digital banks will likely enter a period of consolidation which complements the collaboration
trend. The setup of these digital banks is likely to involve acquiring smaller banks, or collaborating with other lifestyle digital
platforms (including ride hailing, e-commerce, etc.) as the start of a new way to offer financial services. Recently, two tech
companies, Jakarta-based Gojek and Singapore-based Sea Group Ltd, have acquired stakes in existing smaller banks which
will be turned into digital. More similar acquisitions are expected as the Financial Services Authority (OJK) pushes for
consolidation and are keen to issue new rules on digital banking. Companies under our digital banks radar are presented in
Figure 6.

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 Figure 6. Smaller banks under our radar that are likely to transform into digital banks

Gross Core YTD YTD

Market Cap Total Equity Trailing Total Assets Total Loans Total Deposits % Free
Bank Ticker LDR NPL Capital CAR performance performance Ownership
(IDRbn) (IDRbn) PBV (x) (IDRbn) (IDRbn) (IDRbn) Float
Ratio (IDRbn) (%) vs. JCI (%)
PT Bank Central Asia Tbk.
Bank Digital BCA NA NA 1,545 NA 2,890 NA NA NA NA 1,372 821% NA NA NA
(BBCA)
Pt Metamorfosis Ekosistem
Indonesia (37.65%), Pt
Bank Jago ARTO IJ 127,356 1,216 15.4 1,727 619 383 162% 0.4% 1,058 133% 172.0 167.5 26.8%
Dompet Karya Anak Bangsa
(22.16%)
Pt Gozco Capital (20.13%), Pt
Bank Neo Commerce BBYB IJ 4,530 1,108 4.1 4,285 2,970 312 952% 4.7% 1,071 37% 128.2 123.7 25.3% Akulaku Silvrr Indonesia
(24.98%)
PT Danadipa Artha Indonesia
Bank Kesejahteraan
NA NA 1,334 NA 4,063 2,200 2,646 83% 6.6% 1,307 46% NA NA NA (95.92%), PT Koin Investama
Ekonomi
Nusantara (4.08%)
PT Surya Husada Investment
Bank Bumi Arta BNBA IJ 7,669 1,498 5.1 8,043 4,664 6,393 73% 2.6% 1,463 25% 778.3 773.8 9.1% (45.45%), Pt Dana Graha
Agung (27.27%)
PT Inigo Global Capital
Bank Capital Indonesia BACA IJ 5,167 1,621 3.2 19,219 11,646 14,970 78% 4.0% 1,247 10% 94.1 89.6 60.4% (14.73%), PT Delta Indo
Swakarsa (13.98%)
PT NTI Global Indonesia
(60.55%). 1.5% of BANK is
owned by Alphaplus, A
company that is a part of PT
Bank Net Indonesia
BANK IJ 25,796 655 39.4 728 1 NA NA 0.0% 651 331% NA NA NA GK. The beneficial owner of
Syariah
PT GK, Anthony Pradiptya, is
a businessman with Kaesang
Pangarep as his partner in GK
hebat.
PT Bank Rakyat Indonesia
BRI Agroniaga AGRO IJ 24,865 4,218 5.9 80 19,924 23,017 87% 7.2% 4,713 23% 12.6 8.1 12.9%
(87.1%)
PT Philadel Terra Lestari
(8.25%), Salim Group, Asset
Management Arm (37.36%),
PT Indolife Pensiontama
Bank Ina Perdana BINA IJ 8,425 1,151 7.3 5,444 2,607 4,124 63% 1.7% 1,134 41% 115.9 111.4 14.7% (22.47%), DBS Group Holdings
management (10.49%) PT
Gaya Hidup Masa Kini
(9.98%), and PT Samudra Biru
(16.51%).
Bank Harda Internasional BBHI IJ 10,084 348 29.0 2,129 1,372 1,616 85% 3.4% 291 19% 468.4 463.9 26.3% Pt Mega Corpora (73.1%)
Pt Equity Development
Bank Ganesha BGTG IJ 2,950 1,146 2.6 4,758 2,775 3,513 79% 6.3% 1,074 9% 256.8 252.3 57.7% Investment Tbk (29.86%), Uob
Kay Hian Pte Ltd (12.42%)
Pt. Cakra Inti Utama (15.62%),
Bank Artha Graha Pt. Cerana Artha Putra
INPC IJ 5,085 3,299 1.5 28,487 24,052 NA NA 2.6% 2,688 15% 363.8 359.3 55.8%
Internasional (8.37%), Pt. Arthamulia
Sentosajaya (5.26%)
Combined all banks NA 19,138 NA 81,853 72,828 56,974
Combined (excl. Digital BCA and BKE) 221,928 16,260 9.5
Combined (excl. Digital BCA, BKE, ARTO) 94,572 15,044 6.3
*) Bank Jago's PBV using estimated book value after rights issue of IDR 7.05tn

Source: Companies, OJK, Bloomberg, IDX, Trimegah Research. Market cap data as of 8 March 2021; financial data as of 3Q20.

Trend #2: Would a new era for tech-based credit scoring result in better asset quality?
One of the digital banking revolutions is that the risks assessment occurs online, with a technology platform records data about
users’ digital footprints, enables relevant information-sharing, as well as boosts speed, efficiency, and accuracy. According to
the research from the Institute of Digital Finance of Peking University and the Bank of International Settlements, such tech-
based credit-scoring models are better at predicting default risk for retail/SME loans than traditional banks’ models, for at least
three reasons: 1) the credit scoring models include online behavioural indicators (i.e online consumption pattern, online
financial track record, etc.) which are more relevant than the balance sheet information, 2) they use more real-time transaction
data (including cash flows and the business environment) instead of far less up-to-date financial track record, 3) capture data
of borrowers that lack access to services in the formal financial sector. Taking sample of Chinese pioneering digital bank,
WeBank demonstrated relatively better asset quality with its NPL ratio stood lower compared to the other big commercial
banks (see Figure 8).

Trend #3: Optimising back-end processes although optimal CIR level may not be achieved in the near-medium
term
The underbanked or unbanked market has been highly overlooked by the traditional banking industry as it is too expensive to
run a sustainable business based on the cost structure. The digital bank typically runs at substantially lower opex per customer
than for traditional banks, due not only to the absence of physical branches but also to simplified up-front product offerings
and more streamlined processes. According to Bank Jago’s management, the bank aims to achieve optimal CIR level to below
30%.

Launched at the end of 2014, Tencent-backed (~30% stake), WeBank, became the first digital-only bank in China. Should we
look at WeBank’s operational efficiency in 2019, cost-to-income ratio (CIR) stood at ~35% after ~5 years of operations, as
the company spent significant amount of research and development (R&D) expenses in the first ~2 years. Korean Kakao Bank’s
CIR, which was launched in 2016, still hovers at an elevated level after 3 years of operations (please see Figure 9). Note that
both WeBank and Kakao Bank have no physical branches or outlets. Hence, it would take time for digital banks to get a desired
scale and we may not see Indonesian digital banks’ optimal CIR level to be achieved in the near-medium term.

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 7

 Figure 7. Profitability of digital bank vs. big commercial banks Figure 8. Asset quality metrics of digital bank vs. big
in China commercial banks in China

35.0% 1.5% 500%

29.6% 450%
30.0% 1.4%
400%
25.0% 1.4% 350%
20.0% 1.3% 300%
250%
15.0% 13.1% 13.2% 1.3%
11.5% 200%
10.0% 1.2% 150%
4.3% 100%
5.0% 2.2% 2.3% 1.2%
1.8% 50%
0.0% 1.1% 0%
Webank ICBC BOC CCB Webank ICBC BOC CCB

ROE NIM NPL Ratio (LHS) Coverage ratio (RHS)

Source: Companies, Trimegah Research Source: Companies, Trimegah Research

Figure 9. CIR trend of China & Korea’s digital banks since launch

Digital banks' CIR Trend

400% 373%
350%
300% 268%
250%
200%
150%
89%102% 88%
100%
42% 47% 35%
50%
0%
Year-1 Year-2 Year-3 Year-4 Year-5

WeBank Kakao Bank

Source: Companies, Trimegah Research

Trend #4: Emerging ecosystem is the key factor in valuation

We value global digital banks by comparing each bank’s valuation with the respective bank’s number of users (refer to Figure
10) and classifying based on three premium levels: high, medium, low. We take Russian digital bank that was founded in 2006,
Tinkoff Bank, which is valued at a relatively higher premium compared to the other digital banks such as Monzo and Atom
Bank with medium premium level, and WeBank with lower premium level. In our view, this could be a result of the bank's
more established ecosystem with a broader and more diverse product offering relative to other digital banks (see Figure 11-
13) through its super-app which was launched in 2019. In addition to the primary banking products such as current and savings
accounts and SME loans, Tinkoff Bank distinguishes itself by offering investment brokerage services, insurance products, travel
products, and a number of lifestyle services such as restaurants, taxis, cinema tickets, concerts, etc. We pick UK's Monzo and
Atom Banks with medium premium level and Chinese WeBank with lower premium level. Both UK banks’ product mix is not as
diverse, offering current and savings accounts along with various lending products (i.e. SME loans, mortgage and other
consumer loans), while Chinese WeBank is focused on retail and SME loans through leveraging the network from WeChat’s
customers. All in, we think the emerging ecosystem is the key to examine how Indonesian digital banks’ valuation will
eventually look like as they mature.

We examine Bank Jago’s valuation using the same exercise for the global digital banks in Figure 10. We use Bank Jago’s
(ARTO) market cap of ~IDR118.9tn (as of 3 March 2021 closing) and compare with the potential number of users that Bank
Jago can get from Gojek’s ecosystem. Assuming Bank Jago can grab up to 10% of Gojek’s users (up to ~15mn users), current
ARTO’s valuation falls within the high premium category (N26, Tinkoff, etc). Assuming Bank Jago can grab 10%-25% of Gojek’s
users (15mn-38mn users), current ARTO’s valuation is similar to the medium category (Monzo, NuBank, etc) and if Bank Jago
can tap >25% of Gojek’s users (>38mn users), current valuation is still within the low premium category (WeBank, MYBank,
etc).

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 8

 Figure 10. Global digital banks’ valuation per user

Digital banks' user worth

800 1,300 1400

700 1200

600 1000

500 800

400 600

300 400
200
200 34 20 200
13 12 7 2 2 4
100 0

- -200
Kakao Tinkoff N26 Starling Current Monzo NuBank Ant MYBank WeBank
Bank Bank Financial

Valuation/user (in USD, LHS) # of users (mn, RHS)

Source: Companies, Various News Sources, Trimegah Research

Figure 11. Russia’s Tinkoff digital financial and lifestyle ecosystem built around customer needs

Source: Company, Trimegah Research

Figure 12. Monzo financial product offering Figure 13. WeBank financial product offering

Source: Company, Trimegah Research Source: Company, Trimegah Research

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 9

Trend #5: more lifestyle-oriented and financial management product innovations
As of now, the existing commercial banks’ digital applications allow customers to conduct basic transactions while still
maintaining a physical presence including in the form of branches and ATMs. We compare several domestic mobile banking
applications with global digital banks’ application (see Figure 17 in page 11). In terms of product, the value propositions offered
by the existing mobile banking app are quite similar with the ones offered by selected global digital banks we summarize in
Figure 17, except the business and mortgage loans. We think the tipping point for retail customers will come when the
upcoming digital banks provide one-stop application by partnering with lifestyle digital platforms (such as e-commerce,
transportation, F&B, entertainment, etc.) and offering more portfolio of products and services that traditional banks can today,
such as financial management features (financial planner, goal savings, etc.). Additionally, collaboration with the other digital
platforms in providing digital banking products is expected to boost digital banks’ fee-based income as transactions will
contribute significantly to the income, in our view. Note that WeBank’s fee income contributed 36% to total revenue (vs. ICBC
and CCB’s of ~21-22% - see Figure 14).

Figure 14. Fee income contribution of WeBank, ICBC, CCB

Fee income contribution to total revenue

50%
44%
45%
40% 36%
34%
35%
30% 26%25%
24% 23% 23%24%
25% 22% 21%21% 22%21%
20%
15% 12%
10%
5%
0%
2015 2016 2017 2018 2019

WeBank ICBC CCB

Source: Companies, Trimegah Research

Will big banks’ sticky deposit customers shift?

We think Indonesian banks, which have started the digital journey for several years, are already IT savvy with strong digital
capabilities and are likely to continue evolving and delivering value propositions that digital banks can offer, while the new
digital banks should keep the traditional banks on their toes to sharpen their digital capabilities. While it may be easier to
acquire new customers, one of the challenging parts for digital banks on the funding front is to maintain customer stickiness
and gain significant amount of deposit over time. Indonesian big banks included in BUKU IV category (including BBRI, BMRI,
BBCA, BBNI, BDMN, BNGA, PNBN, and BNLI) have a long history of effectively protecting their deposit market share from
digital disruption as BUKU IV banks’ digital transformations continue to evolve. Thus, aggressive deposit pricing competition
is an unlikely path for digital banks to follow, in our view. However, note that the competition among BUKU IV banks is heating
up as savings market share have been shifting from big tier-1 banks (BBRI, BMRI, BBNI, and BBCA) to the tier-2 banks (BNGA,
BDMN, BNLI, and PNBN) over the past ~two years. This is likely attributed mainly to the development of digital banking
services in the tier-2 banks such as BNGA (through its Octo Mobile app) and BNLI (through its Permata Mobile X) over the past
couple of years, in our view. Hence, although BUKU IV savings customers in general are sticky, they may shift to banks with
more pronounced effort in the digitalization front.
Figure 15. BUKU IV banks’ savings market share Figure 16. Breakdown of BUKU IV savings market share

BUKU IV banks' savings market share vs. BI and TD rate BUKU IV banks' savings market share breakdown
80% 12.0 100% 3% 3% 3% 2% 2% 2% 2% 2% 5% 5% 5% 4% 5% 7% 7%
70% 90%
10.0
80%
60%
8.0 70%
50%
60%
40% 6.0
50% 97% 97% 97% 98% 98% 98% 98% 98% 95% 95% 95% 96% 95% 93% 93%
30% 40%
4.0
20% 30%

2.0 20%
10%
10%
0% 0.0
0%
2Q14

3Q15

2Q18

3Q19
1Q13
2Q13
3Q13
4Q13
1Q14

3Q14
4Q14
1Q15
2Q15

4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18

3Q18
4Q18
1Q19
2Q19

4Q19
1Q20
2Q20
3Q20

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20

Savings market share (LHS) 3M time deposit rate (%, RHS) BI Rate (%, RHS) 4 big banks Ex-4 big banks

Source: OJK, Bloomberg, Trimegah Research Source: OJK, Companies, Trimegah Research
BUKU IV banks include BBRI, BMRI, BBNI, BBCA, PNBN, BNLI, BDMN, BNGA Big banks: BBRI, BMRI, BBCA, BBNI; Ex 4 big banks: BNLI, BNGA, BDMN, PNBN

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 10

 Figure 17. Comparison between m-banking services offered by selection of Indonesia’s banks vs. global digital banks’
application

Indonesia OCTO Global

Features BCA Mandiri BNI Mobile Permata Jenius Atom Hello
Mobile Online Mobile (CIMB) Mobile X (BTPN) Monzo Bank N26 Bank
Products
Mutual Funds No No Yes Yes Yes No No No No Yes
Bonds No No Yes Yes Yes No No No No Yes
Top up e-Wallet Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Exchange rate Yes Yes No Yes No Yes No No No No
Time deposit No No No Yes Yes Yes Yes No No No
Pilgrimage No No Yes No Yes No No No No No
Giro Account No Yes Yes No Yes Yes Yes No Yes Yes
QR Scan Yes Yes Yes No No Yes No No No No
Budget/Money Insights No No No No No Yes Yes Yes Yes Yes
Signup Credits No No No No No No No No No Yes
No ATM Fees Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
No interbank cash transfer fees No No No No No Yes Yes Yes Yes Yes
Cash transfers Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Contactless pay Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Obtain loans No No No No No Yes Yes Yes Yes Yes
Instant Notifications Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Apple/Google Pay No No No No No No Yes No No No
Payment
Handphone Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Electricity Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Credit card Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Charity Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Internet Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Education Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
TV Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Tickets Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Loans Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Taxes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
PAM/PDAM Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Insurance Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Commerce Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
E-wallet Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Functionality
Account registration via app Yes No No Yes Yes Yes Yes Yes Yes Yes
Login via username No Yes Yes Yes Yes Yes Yes Yes Yes Yes
Login via password Yes Yes Yes No Yes Yes Yes Yes Yes Yes
Login via fingerprint No Yes No Yes Yes Yes Yes No Yes No
Login via Face ID No No No Yes Yes No No Yes No No

Source: Companies, Trimegah Research

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 11

Trend #6: Serving the unserved and the underserved
Can digital banks close the SME financing gap?
According to Indonesia’s Ministry of Cooperatives and SMEs, SMEs contributed ~60% to total Indonesia’s GDP. Despite their
significant contribution to GDP, loans to SMEs are disproportionately fewer than the higher ticket size segments (only 11% of
SME economic contribution financed by bank loans as suggested by SME loans-to-GDP ratio of ~11%). According to OJK, bank
loans to SMEs only correspond to ~19% of the banking industry’s outstanding loan portfolio. This may point towards some
unaddressed gaps in SME financing. One of the reasons is that SMEs, while plentiful, are lacking access to financial services
given their small size and geographical distribution. A more important reason is that several banks are less capable to apply
market-based risk pricing effectively for SMEs.

Figure 18. SME loan-to-GDP ratio Figure 19. SME loans as % of banking industry loans

1200 11.5% 1200 19%

18.8% 19%
1000 1000
10.8% 11.0% 19%
18.6%
800 800 18.6% 19%
10.5%
19%
600 600
18%
10.0%
400 400 18.3% 18.3% 18%

9.5% 18%
200 200
18%
802 883 970 1,045 1,024 802 883 970 1,045 1,024
0 9.0% 0 18%
2016 2017 2018 2019 Nov-20 2016 2017 2018 2019 Nov-20
SME loans (IDRtn, LHS) SME loan-to-GDP ratio (RHS) SME loans (IDRtn, LHS) SME loans as % of banking industry loans (RHS)

Source: OJK, BPS, Trimegah Research Source: OJK, BPS, Trimegah Research

How sizeable is the potential loan size to the major digital banks?
We take Bank Jago as our case to estimate the potential SME loans size that can be tapped via partnership. The ultimate aim
of Bank Jago-Gojek partnership (Gojek now owns ~22% of Bank Jago) is for Bank Jago to provide access to digital banking
services through Gojek's platform, allowing Gojek's ~170mn of users (as of June 2020, according to App Annie’s data) to
instantly open a bank account with Bank Jago and better manage their finances via Gojek app. On the SME lending side, we
estimate the potential loan size from Bank Jago–Gojek may exceed ~IDR7tn (see Fig 19).

According to Bloomberg, Gojek is reportedly in discussions with Tokopedia for an estimated USD 18 bn merger. Gojek has
~2mn driver-partners and ~900k SME merchants, while Tokopedia claims to have ~9.9mn merchants on its marketplace. The
synergies between Gojek-Tokopedia would have a more comprehensive value proposition that will likely attract more users
and increase their stickiness, as well as allow them to share a more comprehensive data set on the backend as Gojek can
provide lifestyle data, while Tokopedia can offer e-commerce records. SMEs on Tokopedia will also be able to access financial
services, including loans from Bank Jago. According to our calculation, the estimated potential loans from SMEs on Tokopedia
may exceed ~IDR18tn (see Fig 20).

Shopee’s parent, Sea Group, is also tapping the digital banking sector in Indonesia by acquiring Bank Kesejahteraan Ekonomi
(BKE) as the initial move, which is likely to be Bank Jago’s major digital bank rival in Indonesia. According to the news source,
Sea Group is also planning to buy another small publicly listed bank and to merge into Bank BKE. The digital bank can be used
by customers on Shopee, allowing for an easier access to loans for merchants. From Shopee’s ecosystem in Indonesia, we
estimate SME loans may exceed ~IDR27tn – refer to Figure 21 (vs. Gojek-Tokopedia total estimated SME loans of > IDR25tn
assuming base SME loan-to-GDP ratio). Going forward, we think there will be more tech companies entering the digital banking
segment in Indonesia.

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 12

 Figure 20. Estimated potential loan size from ride hailing platforms

Gojek Grab
in IDR tn
GoRide Drivers est. Contribution to GDP 11.1 IDRtn GrabFood Contribution to GDP 37.3 IDRtn
GoCar Drivers est. Contribution to GDP 7.7 IDRtn GrabKios Contribution to GDP 3.1 IDRtn
GoFood Merchants est. Contribution to GDP 34.1 IDRtn GrabBike Contribution to GDP 26.2 IDRtn
GoPay Merchants est. Contribution to GDP 9.9 IDRtn GrabCar Contribution to GDP 10.8 IDRtn
Total Gojek's Contribution to GDP 62.8 IDRtn Total Grab Contribution to GDP 77.4 IDRtn

Est. SME Loans Est. SME Loans

SME loan-to-GDP ratio assumption Est. Loan Size SME loan-to-GDP ratio assumption Est. Loan Size
10.8% 6.8 IDRtn 10.8% 8.4 IDRtn
12% 7.5 IDRtn 12% 9.3 IDRtn
14% 8.8 IDRtn 14% 10.8 IDRtn
16% 10.0 IDRtn 16% 12.4 IDRtn
18% 11.3 IDRtn 18% 13.9 IDRtn
20% 12.6 IDRtn 20% 15.5 IDRtn

Source: LD UI Research Collaboration with Gojek (2019), CSIS Survey (2019), Trimegah Research
Base scenario using latest SME loan-to-GDP ratio of ~11%.

Figure 21. Estimated potential loan size from e-commerce platforms

Tokopedia Shopee
in IDR tn
Tokopedia est. GMV 2019 170 IDRtn Shopee GMV 2019 247 IDRtn

Est. Potential SME Loans Est. Potential SME Loans

SME loan-to-GDP ratio assumption Est. Loan Size SME loan-to-GDP ratio assumption Est. Loan Size
10.8% 18.4 IDRtn 10.8% 26.7 IDRtn
12% 20.4 IDRtn 12% 29.6 IDRtn
14% 23.8 IDRtn 14% 34.6 IDRtn
16% 27.2 IDRtn 16% 39.5 IDRtn
18% 30.6 IDRtn 18% 44.4 IDRtn
20% 34.0 IDRtn 20% 49.4 IDRtn

Source: LPEM FEB UI Research, Tokopedia, Statista, Trimegah Research

We expect limited impact for the commercial banks in the near-medium term
Commercial banks, especially BBRI, BBNI, BMRI and BBCA, have been on their digital transformation journey over the past
several years. Several big banks have already partnered up as well with the e-commerce, ride hailing, fintech, and other digital
platforms (including Tokopedia, Shopee, Gojek, Grab, etc.) through open banking application programming interface (API)
services, creating vast ecosystem. The open banking mechanism allows e-commerce and other digital platforms to directly
apply for loans to the commercial banks. SOE big banks have been channelling loans for e-commerce and ride-hailing
merchants using the product called “Micro KUR”. As the untapped chunk remains sizeable, we expect the competition to remain
healthy with the existing big commercial banks as digital banks will have their own segmentation without disrupting each
other’s market.

BBCA has been trading at relatively higher premium compared to the other peers due to its rich CASA franchise (BBCA’s CASA
ratio stood at 77% vs. BBRI/BMRI/BBNI 2020 CASA ratio of 60%/68%/69%) which results in very low cost of fund. We
previously have mentioned that retail customers may put significant amount of deposit when the digital banks provide one-
stop lifestyle and financial solutions. Hence, if we should pick among big banks, long-term risks from the rise of the digital-
only banks are likely to be felt by BBCA.

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 13

How did global commercial banks’ share price react to the digital bank trend?
We look at China’s big banks’ valuation trend vs Tencent as well as Korean’s big banks vs Kakao (note that WeBank launched
in 2014, while Kakao Bank was in 2016). The de-rating in big Korean banks’ PBV in 2018-2019 is mainly driven by squeezing
loan yield due to weaker economic growth, lower fees from stricter regulation in credit cards segment, as well as mortgage
pricing limits. In addition, the trade tension with Japan also worsened the condition along with the rate hike uncertainty. For
Chinese big banks, the de-rating in 2018-2019 is driven by the tightening regulation, trade war, and the benchmark rate cut.
Overall, we do not see meaningful impact of emerging digital banks to the big commercial banks’ valuation.

Figure 22. Korean big banks vs Tencent valuation trend (re- Figure 23. Chinese big banks vs Tencent valuation trend (re-
base) base)

PBV trend (rebase)

PBV trend (rebase)
160
250
140

200
120

100
150
80

100
60

40
50

20
0
0
1/1/2016
2/20/2016
4/10/2016
5/30/2016
7/19/2016
9/7/2016
10/27/2016
12/16/2016
2/4/2017
3/26/2017
5/15/2017
7/4/2017
8/23/2017
10/12/2017
12/1/2017
1/20/2018
3/11/2018
4/30/2018
6/19/2018
8/8/2018
9/27/2018
11/16/2018
1/5/2019
2/24/2019
4/15/2019
6/4/2019
7/24/2019
9/12/2019
11/1/2019
12/21/2019
2/9/2020
3/30/2020
5/19/2020
7/8/2020
8/27/2020
10/16/2020
12/5/2020

3/16/2018
5/20/2018
1/1/2015
3/7/2015
5/11/2015
7/15/2015
9/18/2015
11/22/2015
1/26/2016
3/31/2016
6/4/2016
8/8/2016
10/12/2016
12/16/2016
2/19/2017
4/25/2017
6/29/2017
9/2/2017
11/6/2017
1/10/2018

7/24/2018
9/27/2018
12/1/2018
2/4/2019
4/10/2019
6/14/2019
8/18/2019
10/22/2019
12/26/2019
2/29/2020
5/4/2020
7/8/2020
9/11/2020
11/15/2020
1/19/2021
KAKAO Corp KB SHINHAN HANA
TENCENT ICBC CCB ABC

Source: Bloomberg, Trimegah Research Source: Bloomberg, Trimegah Research

Will digital adoption overcome the Java-centric issue in loan distribution?

For the new digital bank players, there will be many challenges given the uneven digital infrastructure in Indonesia, especially
in rural areas. In addition, fintech lending businesses, which has been around since 2016, currently are still facing the same
problem whereby the majority of their loan distribution is in Java and they are struggling to penetrate in rural areas (note that
out of the total ~IDR15tn fintech P2P outstanding loan or ~0.3% of banking industry’s total loans, only 18% came from ex-
Java regions). Currently, the transactions of micro borrowers in rural areas are mainly served by the presence of agents with
Branchless Financial Services in the Inclusive Finance framework (Laku Pandai) i.e. BRILink for BBRI. While the existing micro
banks like BBRI can get funding support from government (state budget), the digital banks will not have such govt support.
Hence, it may be challenging for the digital banks to grow in rural areas. Additionally, given micro segment’s sticky type of
customers due to the personal attachment formed with the field officer, we think the impact of digital banking disruption to
micro segment market share of big commercial bank like BBRI is likely to be limited.

Figure 24. Fintech outstanding loan in Java and ex-Java Figure 25. Fintech borrower accounts distribution per region

18 Fintech Borrower Accounts by Region

16 1%
1% 0%
2%
3%
14

12
Jawa
8%
10
Sumatera
8
Kalimantan
6
Sulawesi
4
Papua dan Papua Barat
2
Kepalauan Nusa Tenggara
0
85% Kepalauan Maluku

Outstanding in Java (IDRtn) Outstanding Ex-Java (IDRtn)

Source: OJK, Trimegah Research Source: OJK, Trimegah Research

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 14

Regulatory landscape: awaiting the legal umbrella
Regulatory landscape in Indonesia: Awaiting the legal umbrella
Unlike in Singapore and Hong Kong who provide separate digital bank licenses, currently Indonesia's digital banks are still
operating under the commercial bank license and yet to have a legal umbrella on the digital banks. The existing legal
regulations on digital services in banks are accommodated by POJK No.12/2018 as the legal umbrella for the implementation
of digital services by commercial banks and POJK No.38/2016 concerning the application of risk management in the use of
information technology by commercial banks. More favourable regulatory landscape for digital banks, such as in Hong Kong,
presents lower barriers of entry with a unique opportunity for non-financial companies to become a fully functional bank.
Hence, we expect it would create higher level of competition in the banking sector as it should encourage the incumbents to
achieve higher service standards, in our view.

The level of competition would be driven by regulatory barriers

Typically, Indonesia is likely to adopt regulations that are already being implemented in SEA countries. We provide several
licensing frameworks, including in Singapore and Hong Kong. Both countries’ licencing framework for digital banks illustrate
the differing approaches countries are taking when regulating this new industry. Singapore presents much stiffer rules in order
to become a digital bank, especially for those who seek to serve retail customers. To become a Digital Full Bank, applicant will
require to enter a 3-5 year period as a “Restricted Full Digital Bank” in which they will be subject to limited business operations
with strict deposit caps before they can become fully operational. This is expected to act as a trial period and an opportunity
for prospective digital banks to prove they can manage the risks involved and deliver its value proposition, considering many
of these companies are not conventional finance entities. This cautious approach also serves to protect the core of the country's
banking system, in our view. The other hand, in Hong Kong, both financial and non-financial firms are able to apply for a digital
bank license, with the only main requirement being the entity has to be incorporated locally. The digital bank is also not subject
to a transitional period before they become fully operational, with no deposit caps or any restrictions on services and products
they provide relative to conventional banks.

Figure 26. Variety of digital bank licensing in different countries

Source: Trimegah Research

Figure 27. Description of each type of digital bank license

Digital Banks: A Variety of Licensing

Type of License Description Countries
This entails that digital banks require a separate license that is unique to digital banking.
Taiwan,
Countries that adopt the use of these licenses often require the digital bank have little
Bespoke Digital Banking License Hong Kong,
no no physical presence, but they also require fundamental requirements for banking
Korea
such as consumer protection, risk management, and capital requirements.
Singapore,
This licensing process begins with new entrants receiving authorization to become a bank
United
but with limited business capacities, such as the amount of deposits they can collect,
Phased/Restricted Approach Kingdom,
before becoming fully operational. The objective is to "ease" less established names that
Malaysia,
may not have the required up front capital, or lack of infrastructure.
Australia
Brazil, South
Countries can also choose not to create separate licensing for digital banks, instead
No Separate Digital Banking License Africa,
opting to license them under current banking framework and regulations.
Germany

Source: Trimegah Research

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 15

 Figure 28. Digital banking regulatory landscape in Singapore and Hong Kong, vs Indonesia

Framework Singapore Hong Kong Indonesia

Banks providing the Digital Banking Services must meet the
following requirements:
a. to have risk profile that Ranks 1st (first) or 2nd (second)
based on the assessment of the Bank’s soundness level in the
At least one entity in the applicant group requires three or more last period of assessment;
Both financial and non-financial firms are allowed to apply to
Scope years of track record in operating an existing business in the b. it has sufficient Information Technology infrastructure and
operate a virtual bank in Hong Kong, including existing banks.
technology or e-commerce field to be eligible. Information Technology infrastructure management; and
c. it falls in the category of Commercial Bank based on
business activities which is able to at least carry out business
activity in Electronic Banking Services as set out in the
provisions of Financial Services Authority.
5 licenses have been issued, including 2 Digital Full Banks (DFB) and
No. of licenses 8 licenses have currently been issued None
3 Digital Wholesale Banks (DWB).
- MAS will only consider DFB applicants who are anchored in - The digital bank must be incorporated locally.
Singapore, controlled by Singaporeans and headquartered in - No foreign ownership restrictions, however if The bank is not
Ownership Entity must be registered in Indonesia
Singapore. owned by a financial institution, it must be held by an intermediate
- Digital Wholesale Banks must be incorporated in Singapore holding company in Hong Kong.
- A DFB will be able to conduct all banking businesses and are
subject to the same regulatory requirements as existing full banks.
These include requirements relating to technology risks, money- - Bank may provide Electronic Banking Services or Digital
laundering and terrorism financing risks, and the conduct of non- Banking Services. Services must be provided by the Bank or
financial businesses. No significant operational restrictions, however Digital banks are Bank pursuant to a partnership agreement between the Bank
Operational
- DFBs are only allowed to operate one physical place of business. A not expected to have any physical presence such as branches or and its partner.
restrictions
“place of business” is generally any place where a bank conducts ATMs. - Bank providing Digital Banking Services shall be obligated to
banking business or other regulated businesses establish a unit or function which has the duty of handling
- DFBs are not allowed to access ATMs or CDMs network, but will the administration of Digital Banking Services.
be able to offer cashback services through EFTPOS terminals at
retail merchants.
- Deposit cap for Restricted Digital Full Bank in the Entry phase (1-2
years) is SGD 75,000 per individual and SGD 50 million in aggregate.
Deposit taking - Aggregate deposit cap for Restricted Digital Full Bank in the
None None
restrictions Progression stage (2-3 years) will start to increase subject to MAS
approval. Customer deposit caps will stay the same
- A fully operational Digital Full Bank will have no deposit caps
- A Digital Wholesale Bank will not be allowed to grant unsecured
credit facilities to retail individuals. These are individuals who do
Digital Banking Services provided by Bank as referred to in
not fall within the definition of “accredited investor” under the
Article 8 paragraph (1) point a shall be as follows:
Securities and Futures Act.
a. account administration;
Product - MAS does not expect a DWB to serve retail individuals, such as
None. b. transaction authorization;
restrictions providing financial advice to these individuals. On an exceptional
c. financial management; and/or
basis, MAS may allow such offerings, provided that there is a strong
d. other financial product services upon approval from the
nexus and is necessary to the applicant’s core offering(s) to the non-
Financial Services Authority.
retail segment. This will have to be proved in the applicant's
business plan.
- Minimum paid up capital for Restricted Digital Full Bank in Entry
phase is SGD 15 million
- Minimum paid up capital for Restricted Digital Full Bank in
Progression phase will start to increase subject to MAS approval
Capital and - Minimum paid up capital for fully operational Digital Full Bank is - Minimum paid up capital: HKD 300 million
liquidity SGD 1.5 billion - Subject to the same set of supervisory requirements as Must have core capital ownership of Rp 1 to 5 trillion.
requirements - A Digital Full Bank will be subject to the same level of risk-based conventional banks, including a capital adequacy ratio of 8%
capital requirement as a D-SIB, which would include 6.5% CET1
Capital Adequacy Ratio (CAR), 10% Total CAR, 2.5% capital
conservation buffer, and up to 2.5% countercyclical capital buffer.
- A DWB requires a minimum paid-up capital of SGD 100 million

Source: MAS, OJK, HKMA, Trimegah Research

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 16

Where are we currently?
Digital banking services are still in the early stage in Indonesia’s banking industry. According to OJK, the transformation from
traditional banking into digital banking in Indonesia is divided into two phases: 1) digital branch, whereby the branch offices
in certain locations provide digital electronic means. At this stage, banks can provide several types of digital media at the
digital branch offices, 2) banking anywhere, whereby the banks provide digital banking services, so that customers can access
their transaction needs using the digital media such as smart phones, tablets, laptops, etc. At this stage, digital media to
support ‘banking anywhere’ will be identified and finalized at the post-implementation stage of the digital branch. We are
currently between phase-2 and phase-3, accommodated by the regulation from OJK on Digital Banking Services (POJK
No.12/2018). OJK is said to target issuing regulations on digital banks before the end of the first semester of this year.

Figure 29. Digital transformation phase in Indonesian banking industry according to OJK

Phase-1: Phase-3:
Phase-2:
Traditional Banking
Digital branch
banking anywhere

POJK No.12/2018 – “Digital Banking Services”

Source: OJK, Trimegah Research

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 17

 Research Team
Strategy, Digital, Telecom, and
Sebastian Tobing sebastian.tobing@trimegah.com +62-21 2924 9105
Commodities
Willinoy Sitorus Banks, Automotive and Small Caps willinoy.sitorus@trimegah.com +62-21 2924 9107
Fakhrul Fulvian Economics, Fixed Income fakhrul.fulvian@trimegah.com +62-21 2924 9097
Darien Sanusi Consumer Staples, Retail, Healthcare darien.sanusi@trimegah.com +62-21 2924 9106
Heribertus Ariando Consumer Staples and Media heribertus.ariando@trimegah.com +62-21 2924 9060
Farah Rahmi Oktaviani Cement, Property and Infrastructure farah.rahmi@trimegah.com +62-21 2924 6325
Rifina Rahisa Banks, Multifinance, Digital Financials rifina.rahisa@trimegah.com +62-21 2924 9103
Hasbie Small Cap & Automotive hasbie@trimegah.com +62-21 2924 6322
Kenny Vincent Economics, Fixed Income kenny.vincent@trimegah.com +62-21 2924 6325
Pandu Megananda Digital Media pandu.megananda@trimegah.com +62-21 2924 9088
Nur Marini Corporate Access marini@trimegah.com +62-21 2924 6323

Institutional Sales Team

Beatrix Susanto Head of Institutional Sales beatrix.susanto@trimegah.com +62-21 2924 9086
Henry Sidarta, CFTe Deputy Head of Institutional Sales henry.sidarta@trimegah.com +62-21 3043 6309
Dewi Yusnita Equity Institutional Sales dewi.yusnita@trimegah.com +62-21 2924 9082
Gerry Benedict Equity Institutional Sales gerry.benedict@trimegah.com +62-21 2924 9081
Raditya Andyono Equity Institutional Sales raditya.andyono@trimegah.com +62-21 2924 9146
Calvina Karmoko Equity Institutional Sales calvina.karmoko@trimegah.com +62-21 2924 9080

Retail Sales Team

Andrew Jatmiko Head of Retail Equity Sales andrew.jatmiko@trimegah.com +62-21 3043 6310
Hasbie Sukaton Deputy Head of Retail of Sales hasbie.sukaton@trimegah.com +62-21 2924 9088
Jakarta Area
Untung Wijaya Kelapa Gading, Artha Graha, Jakarta untung.wijaya@trimegah.com +62-21 4503 345
Windra Djulnaily Pluit, Jakarta windra.djulnaily@trimegah.com +62-21 6660 1456
Ignatius Candra Perwira BSD, Tangerang ignatius.perwira@trimegah.com +62-21 5386 700
Sumatera
Juliana Effendy Medan, Sumatera Utara juliana.effendi@trimegah.com +62-61 4520 336
East Indonesia
Pandu Wibisono Surabaya, Jawa Timur pandu.wibisono@trimegah.com +62-31 5623 720
Carlo Ernest Frits Coutrier Makasar, Sulawesi Selatan carlo.coutrier@trimegah.com +62-41 1850 222
Central Java, Area
Mariana Kusuma Wati Semarang, Jawa Tengah mariana.kusuma@trimegah.com +62-24 8452 333
Antonius Santoso Solo, Jawa Tengah antonius.santoso@trimegah.com +62-27 1733 328
West Java
Asep Saepudin Bandung, Jawa Barat asep.saepudin@trimegah.com +62-22 4267 929
Ariffianto Cirebon, Jawa Barat ariffianto@trimegah.com +62-23 1829 1155

PT Trimegah Sekuritas Indonesia Tbk – www.trimegah.com 18

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 Analysts Certification

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