Digital Bank

The banking industry has experienced a significant transformation over the past decade, thanks to the introduction of digital technologies.

One notable change is the increasing adoption of mobile banking by customers, which has revolutionized the way people bank.

With mobile banking, customers can now access banking services conveniently from anywhere and at any time, leading to enhanced efficiency and convenience within the industry.

Bank Indonesia has provided data indicating the growing prominence of digital banking. In March 2023, digital banking transactions saw a significant year-on-year increase of 9.88%, reaching Rp4,944.1 trillion. This statistic underscores the increasing reliance of customers on digital banking solutions and reflects the sector's ongoing growth.

Digital Banking Transactions in Indonesia

Furthermore, global peers in the banking industry have demonstrated impressive growth and outperformance in recent months. This can be attributed to their stronger-than-expected operational performance and the positive sentiment towards the technology sector as a whole.

For example, companies like NuBank in Brazil, PayTM in India, and SoFi in the US have experienced remarkable share price increases YTD. NuBank's share price has surged by 124%, while PayTM and SoFi have seen rises of 59% and 89% respectively. These figures highlight the significant market enthusiasm and investor confidence in these pioneering digital banking companies.

Meanwhile, domestically, ARTO has observed a notable 52% increase in share price over the past three months. This serves as a positive signal, leading us to believe that BBYB will also experience a similar outcome in the upcoming results.

Several factors suggest that BBYB is poised to record a positive bottom line this year. Firstly, earnings remain on track, primarily driven by a respectable growth in the balance sheet and a notable increase in Net Interest Margin (NIM), which has remained stable around 17%.

Additionally, the bank is actively raising provision coverage, demonstrating a proactive approach to risk management. The Pre-Provision Operating Profit (PPOP) has significantly improved, reaching Rp757 billion in the first five months of 2023, a remarkable recovery from the net loss of Rp332 billion in the same period last year.

Furthermore, the bank has achieved 77% coverage of Non-Performing Loans (NPLs) in 5M23, moving closer to the target of 85% coverage by 2023. The bank's loan loss reserves ratio currently stands at 3.7%, indicating a solid provision for potential credit losses.

Both the loan book and third-party deposits continue to show modest growth, with an increase of 0.6% and 0.8% month-on-month, respectively.

Our Head of Research, Edward, has revised the TP for BBYB to Rp1,600. This TP is based on a 4.4x 2024F PB ratio, assuming a cost of equity of 16.2% and a sustainable ROE of 21.1%.

It's important to note that BBYB is currently trading at a significant discount, with a 2023F PB ratio of 1.5. This discount is notable when compared to its major peers, which are trading at PB ratios ranging from 2.0x to 6.0x.

Considering these positive indicators, it is likely that BBYB will achieve a positive bottom line this year, supported by their on-track earnings, growth in the balance sheet, improved PPOP, NPL coverage, and prudent provision management.