Clearer Guidance Building Confidence in Digital Transformation
New regulations on the implementation of digital banking services
• Indonesia Financial Services Authority (OJK) recently issued two regulations on commercial banks namely POJK No.12/POJK.03/2021 and POJK No.13/POJK.13/2021.
• POJK No.12/POJK.03/2021 regulates on how to establish new banks primarily on the establishment of digital banks. Meanwhile POJK No.13/POJK.13/2021 regulates mainly on digital banking product and services.
• Under POJK No.12/POJK.03/2021, digital banks will operate with only with one physical office as a head office and without any physical branch office or limited physical office for customers. Banks are required to maintain compliance with digital bank requirements (see Exhibit 1).
• The primary focus of POJK No.12/POJK.03/2021 is the bank’s classification based on its tier-1 capital. According to this new regulation, the establishment of a digital bank is divided into two types: 1) Setting up a new entity that fully operates as a digital bank with minimum tier-1 capital of IDR10tn; 2) Transforming a conventional bank into a digital bank that required minimum tier-1 capital of IDR3tn.
The impact of new digital banking regulation
• POJK No. 12/POJK.03/2021 would change the banking classification landscape as can be seen in Exhibit 2. Therefore from our shortlisted 43 publicly traded banks, only 4 (BMRI, BBRI, BBCA, BBNI) that are classified as KBMI 4.
• Banks such as BNLI, PNBN, BNGA, BDMN and NISP that are previously known as BUKU IV, now they fall under KBMI 3 group.
• On a recent comment, OJK urges banks to fulfill minimum tier-1 capital of IDR3tn in 2022, despite the upper classification of KBMI 1 is set at IDR6tn.
• Currently there are 22 out of 43 from our selected publicly traded banks that still need additional capital to meet OJK capital requirement of a minimum IDR3tn tier-1 capital. We name these banks as ‘mini-banks’ (Exhibit 3).
• As of June-21, 19 out of 22 banks would need an equivalent of at least IDR23tn additional capital to meet OJK requirement (Exhibit 4).
• We see these new banking regulations reflect OJK commitment to create a more resilient banking industry with a solid capital and cost efficient banks which offer an innovative and customer centric products and services.
• We believe this regulation will also boost banking consolidation through M&A, thus reducing the number of banks, as establishing a new bank is way more costly than taking over another banks.
• Mini banks would also take benefits from digital banking regulation as they have smaller number of branches and can fully operate as a digital entity, hence become the takeover target for strategic investors.
Overweight Recommendation on Banking Sector
We maintain our Overweight rating on banking sectors as we see a clear regulation particularly on digital banks, also with the recent loosening on social restriction in some part of impacted regions such as Greater Jakarta Area which we believe to gradually bolster loan disbursement. Big-caps top picks are: BBRI, BBNI, BMRI. While, mid-to-small banks to watch (Not Rated) include: AGRO, BANK, BABP, BBYB. Risk to our call: 1) slower-than-expected economic recovery; 2) rising NPL due to slower economic growth; 3) slower-than-expected execution on digital initiatives.
Disclaimer
