SINGAPORE (Oct 14): Bank Permata — 44.6% held by Standard Chartered and 44.6% held by Astra International — has no shortage of suitors. DealStreetAsia reported that DBS Group Holdings is the latest bank to be interested in Bank Permata, following earlier reports that Oversea-Chinese Banking Corp and Sumitomo Mitsui Financial Group are keen.

Do OCBC and DBS need Bank Permata to expand their Indonesian franchises?

The local banks are under pressure to keep their common equity tier 1 (CET 1) ratios at around 13%. A dip below this level could pressure ratings. DBS, OCBC and United Overseas Bank have the equivalent of an AA rating by the three rating agencies, and this enables them to access cheaper funding.

Banks have to navigate a precarious path: maintain high ratings yet have sufficient capital to fund growth, and have access to cheap funding while struggling with low interest rates, which could pressure net interest margins in an environment of slowing economic growth.

Bank Permata faces challenges as well. In 2016, it reported losses of IDR6,483 billion, owing to allowances for impairment losses of IDR12.2 trillion. At that point, its non-performing loan ratio deteriorated from 2.7% as at end-2015 to 8.8% as at end-2016. Bank Permata liquidated part of the NPL portfolio and wrote off IDR4,455 billion of NPLs. It was subsequently recapitalised by raising IDR5.5 trillion through a 249-for-283 rights issue in June 2016.

Earnings have improved since then. In FY2018, Bank Permata’s net profit rose 20.4% y-o-y to IDR901.25 billion ($121.7 million). Loans grew 10.2% y-o-y to IDR99.21 trillion in FY2018, and NPL fell to 4.4%. According to a UOB Kay Hian report last month, headwinds remain. Bank Permata relies significantly on its collaboration with Astra’s multi-finance companies, such as Astra Sedaya Finance, Federal International Finance (FIF) and Toyota Astra Financial Services (TAF), to provide financing for automobiles and other durable goods.

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“Outstanding balance for indirect consumer finance was IDR10.7 trillion as at Dec 31, 2018, which accounted for 10.8% of total loans. It is uncertain if Astra would continue the collaboration with Bank Permata when it is no longer a shareholder,” UOB Kay Hian points out.

As at Dec 31, 2018, Bank Permata had 323 branches across 62 cities, total assets of IDR153.9 trillion and risk-weighted assets (RWA) of IDR112 trillion and CET 1 of IDR20 trillion. Its CET 1 ratio as at end-December stood at 17.83%.

Interestingly, Bank OCBC NISP has 338 branches and offices across 61 cities in Indonesia. OCBC could well afford to acquire Bank Permata and pay the full price at its market cap of US$2.6 billion without having to raise too much new equity. Maintaining its scrip dividend policy for another year or two would enable OCBC to retain capital of around $810 million every six months, based on a 75% take-up rate for the scrip dividend scheme. Hence, OCBC would be able to maintain its CET 1 ratio at around 13% should it decide to bid for Bank Permata for the equivalent of $3 billion.

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UOB Kay Hian remains sceptical that Bank Permata will be a good fit for OCBC, given the latter’s stated strategy of focusing on the Greater Bay Area in southern China. However, OCBC is also focused on trade, capital and investment flows between North and Southeast Asia and a larger presence in Indonesia definitely helps.

In a recent report, UBS says the combined entity of OCBC NISP Bank Permata will be Indonesia’s fifth-largest bank by assets and give OCBC a significant scale advantage with cheaper funding (resulting in CASA, or current account savings account, ratio of 42% versus NISP’s 37%). The combined entity would contribute 15% of revenues to the OCBC group compared with 8% for just NISP. Of course, there will be problems. “We estimate loans at risk (LAR) remain high at Permata (16.6% versus 4% at NISP),” UBS says.

But, does OCBC need so many branches? Banking is going digital, and branches are beginning to complement digital banking, in which nearly all banking transactions can be carried out on a banking app.

In fact, in 2017, DBS had already launched its standalone digital bank — digibank — in Indonesia. DBS’s CET 1 is around $41 billion, $11 billion more than OCBC’s. However, its RWA is also much higher, and DBS’s CET 1 ratio is 13.6%. A bid for Bank Permata at the equivalent of $3 billion (Bank Permata has around $2 billion of CET 1), could cause DBS’s CET 1 ratio to dip below 13%.

Although Bank Permata appears to be a better fit for DBS, why would it buy a bank with a return on equity of 5.9%? In 1HFY2019, DBS’s ROE was 13.7%, the highest among the local banks. According to Bank Permata’s 2018 annual report, the Indonesian lender faced pressure on net interest margins because of competition for lower-cost funding sources, and also for small and medium-sized enterprise loan products and mortgages.

DBS is also somewhat ahead of the curve in its digital bank. CEO Piyush Gupta said during a results briefing on July 29 that Indonesia’s digibank is doing well. “We are tracking between 80% and 90% of our model expectations. We’ve been able to tweak our customer acquisition methodology, and we’re getting customers with better profiles but with slower customer growth. We also started unsecured lending and other products, which are growing reasonably well.” He added that digibank in Indonesia was likely to be loss-making for another two to three years, but the revenue trajectory was within forecast. Gupta is confident that digibank will hit DBS’s two- to three-year projections.

Bank Permata’s share price is already up 85% since the start of the year. According to press reports, Bank Mandiri was exploring the feasibility of acquiring Bank Permata as early as March this year. In the past, Bank Pan Indonesia, or Bank Panin, CIMB Group Holdings, Malayan Banking and UOB had also considered bidding for Bank Permata.

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Bank Permata draws interest from both DBS and OCBC

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