Bank Permata’s key strengths are its two main shareholders, Standard Chartered Bank (SCB) and Astra International, Tbk (ASII IJ). Both have a joint ownership of 89.12% in Bank Permata, Tbk (BNLI IJ). SCB is a British multinational bank operating in over 70 countries and has a credit rating of A+ by S&P. Whereas, Astra is one of the largest company based on market capitalization in Indonesia and it are also the largest business conglomerate with businesses spanning from automotive, financial services, heavy equipment, agribusiness, IT and infrastructure. Astra has an investment grade rating of Baa3 from Moody’s.
The Commitment and synergy from Astra International &Standard Chartered Bank have been proven their worth since their entry in 2004. Both entities have jointly increased their ownership and have participated to strengthen Permata’s capital. Synergies have also been proven for SCB as it has transferred its international banking practices to help Bank Permata so that it can constantly meet global standards, particularly on risk management. In addition, Astra has provided knowledge in deep local market and has many subsidiaries, affiliates, and customers so that it can increase bank’s penetration to the local market.
Assets quality of Bank Permata has improved sharply in the last 5 years. It beats the industry average. Assets quality has decreased from 4.0% in 2009 to 1.12% in September 2013 and is among the lowest relative to its peers. This proves that the company has provided a prudent lending scheme and does not seek to put credit quality at stake in pursuit of higher yields. Net Interest Margin (NIM) ratio of Bank Permata has been mediocre (4%-6%) which proves the company still is trying to protect its assets are quality. Bank Permata has always been profitable. This should comfort the bondholders.
Bank Permata maintains a positive performance in Q3/2013. It recorded a net income of IDR 1,321,736 million or an increased by 20.9% from the same period in 2012. It is support by an increase in lending of 24.1% compared to its position back on December 31, 2012. In addition, the total assets on September 30, 2013, increased 30% compared to last years position on the 31st of December 2012, making Bank Permata the 7th largest Bank in Indonesia based on total assets.
Bank Permata was formally founded in 2002 through the amalgamation of five banks under the oversight of IBRA (Indonesian Banking Restructuring Agency), namely Bank Bali, Bank Universal, Bank Prima Express, Bank Artamedia and Bank Patriot.
The major milestone during the early establishment of the bank was the entry of Standard Chartered Bank (SCB) and PT Astra International Tbk (Astra) as shareholders in 2004. This marked the beginning of a transformation in Bank Permata with the two major shareholders continuing to strengthen their commitment to Bank Permata overtime. The two prominent entities increased their ownership to 89.01% in 2006 (from 63.1% in 2004) and also participated in the Bank’s rights issue in 2010 to strengthen Bank Permata’s capital. Today, SCB and Astra jointly own 89.12% of Bank Permata.
As of September 2013, Bank Permata has: headquarter in Jakarta, 52 branches offices, 245 co-branch Offices, 7 cash offices, 20 mobiles branch units, 264 Sharia Service Offices and 870 ATMS spread across Indonesia. Its total assets are over IDR154 trillion, ranked as the 7th largest bank in Indonesia by asset size (Exhibit 1) and its asset growth until September of 35% was the strongest growth among the large commercial banks. Bank Permata serves over 2 million customers and handles almost IDR 123 trillion of customer deposit as of September 2013. From about two million customers in Bank Permata, 25% consist of family members. The consumer group clients make up 2/3 of the total, while 1/3 of them comes from corporations.
In developing its business, Bank Permata consistently focuses on its target market segment, the consumer and commercial. For the consumer sector, the company is focusing on the mass and mass affluent segment with an integrated approach on cross selling to increase customer loyalty towards the company. As for the commercial sector, the company is focusing on the industry, through the implementation of a value chain approach and relationship to serve customer needs.
Joint ownership by Standard Chartered Bank and Astra International represents Bank Permata’s key strength
The arrival and the commitment of both SCB and Astra as major shareholders represent one of Bank Permata’s key strengths.
SCB is a British multinational bank founded in 1969 through the merger of Standard Bank of British South Africa and the Chartered Bank of India, Australia and China. The Bank primarily operates in Europe, Asia and Africa, boasting over 87,000 employees, 1,700 branches in over 70 countries. Among the core values of SCB is its long run commitment for progress and which SCB embraces the same approach in Indonesia and in Bank Permata. We believe the support from SCB is highly advantageous should Bank Permata face severe stress.
On the other hand, Astra which was founded in 1957, is a company with the biggest market capitalization in Indonesia and the largest diversified conglomerate in the country with businesses spanning from automotive, financial service, heavy equipment and machinery, agribusiness, IT and infrastructure and logistics. It employs over 112,000 staffs across Indonesia and it is among the best-run companies in the country. Astra has also shown its commitment in Bank Permata since taking ownership in 2004. It also has many of its subsidiaries, affiliations, and customers banking which synergies with Bank Permata. We also believe that Astra’s support will be available for Bank Permata when needed.
Relationship between SCB, Astra and Bank Permata benefits the Bank in many ways. Astra provides valuable support by sharing its deep local market knowledge while SCB supports the Bank by transferring its global banking expertise. The two prominent shareholders ensure that the Bank has risk management, corporate governance, IT capabilities, service level and innovative products that meet international best practices and both SCB and Astra also allow Bank Permata to pursue synergy opportunities with them and their affiliations.
There have been plentiful positive synergies between Bank Permata and SCB-Astra. In 2005 the Bank began developing performance-based organization culture and started enhancing its risk management, treasury, branch network, corporate governance and IT capacities. In the same year the Bank introduced Manhattan Credit Card as form of a strategic partnership with SCB. SCB often advices Bank Permata on potential products and strategies.
Bank Permata also entered into joint financing agreements with various Astra-affiliated companies notably PT Federal International Finance and PT Astra Sedaya Finance to finance motorcycle and car loans respectively. Additionally, Permata also forms various strategic alliances by cross selling It’s banking products to Astra and its affiliated companies’ customers, including value chains financing to all companies under Astra’s group.
Astra and SCB also continuously support Permata’s capital requirements, including USD 100 million subs debt issued in 2009 wholly absorbed by Astra and SCB. The IDR 700bn sub debt issued in 2010 is taken up by SCB. Another IDR 1.75tn public offering sub debt issuance in 2011 where SCB acted as standby purchaser, and lastly IDR 1.99tn rights issue in 2010 and IDR 2 trillion in 2012, where both Astra and SCB both participated and acted as a standby purchaser. We believe the profile of Permata’s owners – SCB and Astra – as well as the commitment shown by them should give bondholders plenty of comfort.
In General, the credit rating granted by rating agency both locally and internationally, indicates that the credit rating of Bank Permata is quite high. In addition to its idAA+ from Pefindo, bondholders can also feel more secure because Moody’s rated an investment grade, Baa3 to Bank Permata. This rank is equivalent to other competitor (Exhibit 2). Meanwhile, the major shareholder of Bank Permata has a strong credit profile. SCB has AA- rating from S&P and Astra has a BBB- rating from S&P. The last issued of Continuous Bonds by Bank Permata of IDR 1.8 trillion have a rating of idAA by Pefindo.
The negative sentiment generated by the uncertainty of monetary stimulus tapering by the US Federal Reserve leads to economic volatility and continues to put pressure on the financial markets among many countries. Tapering increases the investment risk and causes the decline in stock prices, rising bonds yield, and a weakening of the exchange rate in almost all emerging market countries, Indonesia is no exception. High pressure in the global financial markets be occurring amid slowing world economic growth, including China and India, as well as continually declining in commodity prices, excluding the oil price. This condition has put pressure on the performance of Indonesia’s financial markets and trades.
Indonesia’s economic growth in the Q3/2013 recorded 5.62% (yoy), a slowed down compared to Q2/2013 amounting to 5.83% (yoy). The economic slowdown is mainly caused by low investment. The net exports are still weak due to high imports in oil and gas. Meanwhile, the consumption, both government and households showed an increase. Domestic economic slowdown is a result of stabilization policy conducted by the government and Bank Indonesia. Indonesia’s economic growth estimated by BI in 2013 are in the range of 5.5-5.9%.
The pressure on the balance of payments (BoP) still continues, although there is a decrease in intensity. According to Bank Indonesia, in October 2013, the Current Account Deficit (CAD) (Exhibit 3) which in Q2/2013 reached 4.4% of GDP decreased to 3.8% in Q3/2013. The deficit mainly derived from the trade balance of oil and gas, with respect to the still high cost of oil imports for domestic consumption. On the capital and financial balance side, the surplus is expected to come from the foreign capital inflows which consist of Foreign Direct Investment and portfolio investment, in the meantime there are a capital outflow from the stock market. These conditions are expected to support the improvement of the BoP and the stability of foreign exchange reserves. In addition, on November 12, 2013, BI decided to raise the BI rate by 25 bps to 7.50%. The policy considers the magnitude of the current account deficit (CAD) amid the high global uncertainty risk.
Inflation on an annual basis (year-on-year), are estimated to still be high. Nevertheless, the figures show inflation is stabilizing after an increase of fuel prices. On a monthly basis (month-to-month), inflation in October was recorded at 0.09%, and 8.32% (YoY). This shows that the inflation have returned to the norm. We estimate inflation at the end of 2013 would range from 8.3%-8.5% (Exhibit 5).
In addition, the weakening of the Rupiah are still ongoing (Exhibit 6), not only because of the global financial market pressure as it occurs in almost all emerging markets countries, but domestic factors mainly related to high current account deficits (CAD) and inflation as well. On August 28, 2013, the Rupiah closed at IDR10.945 per US dollar, or depreciation of 11.9% by point-to-point from the end of December 2012 position. According to Indonesia’s Central Bank, the depreciation of the Rupiah be reflective of the fundamental conditions. Nevertheless, the uncertainty of Rupiah movements are still relatively high, reflected in the high volatility and wide range of trade. It is because of this the market overreacts.
In 2014, we see that the economy will be relatively stable although all attention will be focused on the upcoming election. Nonetheless, external sentiment will still dominate the economic development, especially the monetary stimulus policies by the Fed. Bank Indonesia’s policy which is unpopular at raising the interest rates to 7.5% will affect the economic slowdown. However, long-term economic stability will be maintained given the focus at lowering the CAD, will improve the economic fundamentals.
BALANCE SHEET HIGHLIGHTS
As of September 2013, total loans reached 75% of Bank Permata’s total assets. Cash, reserves, and interbank placements make up 14%. Whiling the total securities be 6% and the remaining are in other assets (Exhibit 15). The Lending rates and its growth are the most important component for Permata’s revenue. That is because the interest income from its loans make up 91% of the total interest income (2013). In Q3/2013, The loans including Sharia financing grew by 30% yoy from IDR262.96 trillion at the end of September 2012 to IDR116.7 billion at the end of September 2013.
Bank Permata offers a variety of loan products but manages to maintain a balanced mix between loan in small medium enterprises, corporate and consumer loan. Working capital loans make up nearly 41% of total loans, followed by consumer loan and investment loans respectively by 20% and 29%. Most consumer lending are ‘ personal loan ‘ which comprise largely of credit housing and motor vehicles and parts financing channeled through agreement with Astra and its affiliated finance companies. Bank Permata does not engage in high margins lending business such as direct financing or micro-credit financing.
Since the entry of SCB and Astra, the Bank has quadruple its total credits of IDR22.3 billion in 2005 and recorded IDR116 trillion by September 2013. In 2012 Bank Permata recorded a strong credit growth of 37.3% YoY, above the industry growth of 23%. This has made the Loan to deposit ratio (LDR) higher than industry figures even though its LDR has always been below 100% (Exhibit 19), clearly pointed out on Exhibit 19 that Bank Permata has also succeeded in raising its deposit to support lending growth and aims to maintain an optimal liquidity between 80-90% of the LDR.
The other side of Bank Permata’s financial position shows that the ability of the bank to grow its customer deposits had been sufficient to fund It’s lending activities. In September 2013, Bank Permata have IDR123.34 billion of customer deposits compared to its gross loan outstanding balance of IDR116 trillion, implying a LDR ratio of 94.3%. Customer deposits have also tripled since 2005. Customer Deposit is about 87.6% of all Permata’s entire liabilities (Exhibit 20).
In September 2013, approximately 54% of Permata’s customer deposits consist of term deposits while saving deposit and current account deposits, respectively, amounts to 16% and 18% of the total liabilities, implying a CASA ratio of 38% (industry: 56.2%). In the last five years, the CASA ratio recorded ranges between 40%-50% (Exhibit 22). In September 2013, third-party funds including Islamic funding increased by 34% yoy to IDR123.1 billion. Bank Permata recorded CASA ratio growth of 12% yoy to IDR26.2 trillion and term deposit grew by 44% yoy to IDR69.4 trillion.
Tight competition for CASA occurred among major banks in Indonesia. Like BBCA and the BMRI, it continues to be very dominant because they already have economic of scale and invested massive amount in network, marketing efforts and e-channels.
Bank Permata is also eager to increase its CASA ratio to structurally lower their cost of funds. However, it prefers to invest in its network rather than investing in its IT capacity, e-channels and service quality.
In September 2013, Bank Permata had IDR 6.08 trillion worth of debt securities issued (4.5% of total liabilities) which consists of IDR4.25 trillion Subordinate bond, USD700 billion and USD100 million subordinated MTN (Exhibit 24). As indicated earlier, the ability to generate customer deposits had been sufficient to fund It’s lending business entirely, so that the bank’s liability depends on the bond. We believe additional subordinated bonds will increase the CAR ratio and have a small impact on the burden of liability and should not concerns bondholders. In addition, in its history, Bank Permata has never failed to pay an obligation both the interest and principal on bonds.
In September 2013, Bank Permata retains a healthy level of its capital to risk weighted Assets (RWA) and its capital adequacy ratio (CAR) which is up to 117 bps compared to the previous year amid strong credit expansion. Bank Permata noted the tier-1 and CAR are on the level of 9.24% and 14.67% respectively. This ratio is sufficient by international standards and capital adequacy requirement from BI of 5% and 8%. But the figures are still lower than the other competitors.
We estimate that every IDR 100 billion of credit disbursed by the Bank Permata would demand ~ IDR97 billion from RWA or risk weighted assets (Exhibit 27). It is a function of the Bank’s credits profile. Thus, with credit growth continuing to rise, our view suggest that Bank Permata may find it necessary to increase the tier-1 capital by the end of 2013 while at the same time we are confident that support from both key shareholders SCB and Astra will be present.
For supporting the business growth and maintaining the robust capital level, Bank Permata has issued subordinate bond which could be counted as capital tier2 in appropriate with BI requirement. In addition, Bank Permata plan to right issue in the beginning of 2014 for increasing its core capital (tier1) and maintaining its robust capital.
Asset quality has become one of the most prominent thing for Bank Permata and serves as tangible evidence of management’s focus on prudence. The gross NPL have been getting better since its peak in 2006 at 7% to 1.12% on September 2013 (1.4% per December 2012).
The Bank has also been successful in maintaining its relatively stable NPL despite the strong loan growth over the years (Exhibit 28). Relative to its competitors, Bank Permata bank now has among the best asset quality (Exhibit 30). The Bank emphasizes asset quality as the most important element in its operation and does not attempt to enter a high-risk activity in expanding on NIM or pursuing short-term profits. We estimate the gross NPL ratio of Bank Permata will be managed properly.
We believe that the assets quality will continue to stand out as one of the best in the industry so it will convince the bondholders of its strong quality.
Since 2005, the Bank’s ROAE have a range of 5.9% to 14% or an average of 12.5%. Nevertheless, it was still lower than its competitors (Exhibit 31). From the perspective of ROAA, since 2005–2012, the Bank’s ROAA has a range of 0.8% to 1.6% and is also relatively lower than most of its competitors (Exhibit 32). This is largely due to its lower NIM profiles because it does not yet to optimize diversified business that moves on a high margin, such as motorcycles financing or microcredit and opt to adopt a prudent. However, with the credit expansion in small medium enterprise (SMEs) area and acquisition plan of Astra Sedaya Finance, we estimate an increase in profitability next year.
NET INTEREST MARGIN
As briefly mentioned before, Bank Permata does not focus on high margin business based on It’s lending mix and strategy. In the last 7 years, bank’s NIM ranged between 5-6% (Exhibit 35). We estimate that the NIM profile of Bank Permata will increase in the future, although not significantly. We find Bank Permata to began to focus on its Small Medium Enterprises (SMEs) that could be the impetus for its interest margin. But this year, we estimate that the NIM will have a level of 4.5% as the drop in average asset yield and high interest rates.
COST AND EFFICIENCY
Bank Permata believes that prudence and decent growth can be achieved not only by expanding network, but by reaching target customers through electronic channels and mobile use as people will rarely go to the Bank. Therefore, even though the Bank invests in ATMs and branches it also requires most of its investment to improving the service quality.
Relative to the competitors, cost-to-income ratio reached 61.97%. Indeed, it is not among the best (Exhibit 38) but the ratio has clearly been improving over time. We expect operating costs to continue to grow nominally and also expect the cost-to-income ratio to continued to show improvement.