Digital Banks

Still Robust Earnings Growth Potentials Despite Increasing Competition

• Despite heightened competition from new players, we expect Seabank and ARTO to retain their dominance in the digital banking space.
• We expect digital banks’ NP growth to outpace that of conventional banks amid improving market trends and better asset quality coverage.
• We maintain our Overweight rating on the digital banking sector on intact NP growth potential; ARTO is our top pick.

Competition from the emergence of newer digital banks

With the emergence of newer digital banks, such as Superbank, Krom Bank, and Bank Saqu, we anticipate the digital banking landscape will become increasingly competitive in the future. Based on its lending target market, indicated by the EA yield, Krom bank is the only new digital bank that directly competes with Seabank and Bank Neo Commerce, while Bank Saqu and Superbank are positioned alongside the majority of their digital banking peers. We note that this dynamic may shift as the banks ramp up their lending activities, as some have only recently begun operations. In terms of funding rate, Krom Bank is the most aggressive, as reflected in its CoF of 7.5%, which was the highest among its peers (avg of 4.8%) in 6M24, followed by Superbank and Bank Saqu at 7.3% and 4.8%, respectively. 

Digital banks are here to stay, serving the underserved

Despite operating under the same banking license, we note that digital banks generally target different lending customer segments, i.e., less bankable or higher risk. This is reflected in the higher EA yields of the digital banks compared to conventional banks. We note that the EA yields also include non-loan earnings assets, which diluted the loan yield. Most of the conventional banks’ EA yields are below 8%, except for BTPS and BBRI as they serve the micro and ultra micro segments. In contrast, nearly all digital banks have EA yields above 8% (average of 14.9%).

Potentially faster growth than conventional banks

Aggregate digital banks have turned to net profit in 1H24 (from net losses in 1H23), driven by high loan growth and lower CoC, though partly offset by a lower NIM. Despite recent volatility in the mass market segment, digital banks’ risk-adjusted-NIM turned positive (albeit still lower than conventional banks’ 4.1%) from -1.4% in 1H23 to 1.2% in 1H24, which we believe was owed to better credit scoring and more sufficient coverage. As we see these trends continuing, coupled with recovery in the mass market, we expect the digital banks’ NP growth ought to outpace conventional banks, partially justifying their higher valuations.

Maintain Overweight, with ARTO as our top pick

We maintain our Overweight rating on the digital banking sector on the back of immense earnings growth potential, higher digital adoption, and sufficient coverage (1H24 of 281%) against potential asset deterioration. ARTO remains our top pick in the sector, as we believe its steady improvement and customer loyalty will remain key drivers for the bank’s LT growth. Risks to our view are higher CoF and deteriorating asset quality. 

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