Bank Permata Managing Obstacles

By administrator | September 19, 2014 | Finance.
Bank Permata Managing Obstacles

Illustration: Bank Permata Managing Obstacles

Bank Permata Managing Obstacles. We have a marketweight view on Bank Permata’s credit profile, underpinned by its modest financial metrics, well-positioned to withstand economic headwinds, and perceived strong support from its major shareholders; Standard Chartered Bank (SCB) and Indonesia conglomerate Astra International (Astra).

We opine that Bank Permata has robust capability to withstand the economic slowdown in Indonesia, on the back of its sound asset quality, high profitability and sufficient capitalization. However, this is moderated by its less diversified business model, insufficient loan losses coverage and tight funding profiles. The involvement of SCB in the bank’s operation and continue support from its holding companies are important criteria for its rating profiles.


Supportive strong major shareholders
Both SCB and Astra has been showing their support and commitment in Bank Permata via capital injection and subscribing to its bonds. The involvement of SCB in Board of Directors is important to lead and monitor the direction of Bank Permata, notwithstanding knowledge sharing.

Bank Permata Managing Obstacles

Healthy asset quality
Bank Permata’s gross NPL of 1.5% as at 2Q14 is still low compared to industry average of 2.2%. However, weakening of asset quality reduced its loan loss coverage to 76.9%.

Adequate capitalization
Tier-1 and total capital of 9.4% and 13.9% respectively are above the Basel 3 requirements, although below industry average of 17.9% and 19.5% respectively.

Asset quality risk on the weakening of Indonesian economy due to 1) tight liquidity condition on the back of high inflation and interest rate environment; 2) weak Rupiah and external vulnerability; 3) unsupportive commodity prices; and 4) stagnant/slow recovery of global economy. This mitigated by discipline fiscal policies, lowly geared government structures, and ongoing reformations within the government.

Weak provisioning could affect profitability moving forward
Bank Permata will need to incur more impairment as asset quality showing the sign of moderation given its low loan loss coverage of 76.9%.

Seventh largest bank in Indonesia; born from a merger of five banks
PT Bank Permata Tbk (Bank Permata/The Bank) is the result of a merger of 5 banks (PT Bank Bali Tbk, PT Bank Universal Tbk, PT Bank Prima Express, PT Bank Artamedia and PT Bank Patriot) in 2002. Today, Bank Permata is the 7th largest bank in Indonesia with total asset of IDR167trn as of March-2014. Located across 60 cities in Indonesia, the Bank has 312 branches and 904 ATMs with more than 7.6k employees.

Standard Chartered Bank (SCB) and PT Astra International Tbk (Astra) acquired Bank Permata in 2004 and increased their ownership to 89% as at Dec-2013. The involvement of SCB and Astra has since brought major transformation and improvement to the Bank.

Bank Permata Managing Obstacles and Industry Highlights

Indonesia banking system is concentrated with the top 5 banks (out of 119 banks) control around 51% of system assets as at Mar-14. System-wide has made strong recovery since Asian Financial Crisis in 1997-1998 led by the successful reformation of the central bank.

Banks in Indonesia are generally resilient to hold up against the challenging operating environment. We opine that the banks’ capitals are well-buffered against credit impairments given its high net interest margin of 4.2% in May-14 relative to regional peers, despite in downward trend (Chart 1). In addition, Indonesia banking system is well-capitalized with improved total capital of 19.5% in May-14 alongside healthy asset quality with gross non-performing loans of 2.18% in May-14.

Nevertheless, we note that asset quality showing some sign of stress subsequent to the aggressive monetary tightening throughout 2013 with 175bps cumulative increment of policy rate to 7.5% as gross non-performing loans increased from 1.77% in Dec-13 to 2.18% in May-14. Funding and liquidity profile are manageable with loan-to-deposit ratio still below 100% and stable CASA funding of above 50%.

Bank Permata Managing Obstacles and Loan Growth

Loan growth has been encouraging in the past few years with 4y-CAGR of 23% (Chart 5) on the back of strong economic growth. Although excessive loan growth might indicate over-leveraging of the banking system, we view that the risk is still under control supported by 1) system loan-to-GDP is still low at 36% in 1Q14 compare to Malaysia at 124% and Thailand 104%; 2) approximately 72% of bank loans are extended to support business and investment activities which are important to facilitate industrial capacity and economic growth; and 3) high inflation environment between 4%-7% in Indonesia in the past few years has moderated the effective leverage burden. We expect credit to grow at modest pace this year after the steep tightening in 2013 and high inflation rate expectation on the back of fuel subsidy reform.

System-wide foreign currency (FC) loans has remained at stable ranging from 15%-17% as a proportion of total loans in past few years (Chart 6), mitigate the risk of steep depreciation of Rupiah. This level is less vulnerable compare to the FC loans mix of around 35% back in 2001 after the Asian Financial Crisis. In addition, banks fully fund their FC loans with FC deposits where FC loan-to-FC deposit ratio stood at 88% in May-2014.

Bank Permata Managing Obstacles on Regulatory  Front

Banks in Indonesia implemented the capital requirement of Basel III frameworks starting Jan-14, with capital requirement target are in line with Basel Committee’s (BCBS) guidelines (Table 2). The banking system is set to adopt capital conservation and counter-cyclical buffer of 2.5% and 0-2.5% respectively in Jan-19. Leverage ratio of minimum 3% is still in recommendation stage while the regulator yet to come out with the standard for Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSCR).

We view systemic support from the government is high particularly to the top 5 banks which controls approximately half of the commercial banking system assets while other smaller banks with foreign partners derive support from its parents. Overall, the government has strong capability to support the banking system which merely accounts for 36% of the economy, on top of the importance roles of the banks as financial intermediary to facilitate business, industry and investment needs.

Slower growth could dampen short-term prospects
Indonesia registered a slower GDP growth of 5.12% in 2Q14, the lowest level since 2009 during the global economic crisis. The Central Bank stated in a press release that the moderation of the economy would not trigger monetary loosening as controlling inflation and managing fiscal as well as current account deficit are still the major concerns. The finance minister forecasted that GDP growth would rebound by end of the year on the back of stronger government spending, improving exports and resilient domestic demand.

Key challenges to Indonesia’s economy include weaker outlook for commodity prices, slower-than-expected global economic recoveries, external vulnerability and tighter domestic credit conditions will slow down its economic growth. Overall, these are counteracted by the government’s disciplined fiscal policy, low debt profiles and healthy banking system.

Bank Permata Managing Obstacles and Business Highlights

Bank Permata runs a traditional banking business model with 72% of banking activities mainly focused in loans where it commanded domestic market shares of 3.6% in Mar-2014. Financial assets which made up close to 7% of its total assets were mainly low risk liquid securities such as government bonds (37%) and central bank-related notes (49%.

Loans book were business oriented where individual loans comprised of only 21% of the credit book while bulk of business loans are for manufacturing (25%) and wholesale/retail (21%) financing. Banking operations were mainly funded by deposit with low CASA proportion of 33% of deposit base.

Bank Permata Managing Obstacles Management & Governance Analysis

Bank Permata has set up its structure and guidelines in accordance with Bank Indonesia requirements and good banking practice. The previous President Director, Mr. David M. Fletcher, resigned effectively as of 17 Feb 2014 and appointed its Vice President Director, Mr. Roy A. Arfandy, as the Interim President Director until the appointment of new President Director.

Graduated with a degree in Bachelor of Technology, Mr. Roy A. Arfandy has 23 years banking experiences in Indonesia, among others at PT Bank Danamon Indonesia from 1991 until 1994. PT Bank BDNI from 1994 until 1998, PT Bank Dai-Ichi Kangyo Indonesia from 1998 until 2001. PT Bank Mizuho Indonesia from 2001 until 2003. Last, PT Bank DBS Indonesia from 2003 until 2007, before joining Bank Permata in 2007. He has held several senior positions as Head of Credit Services, Segment Head, Commodity & Local Corporate, and Head of Client Relationships.

SCB monitoring the in the day-to-day operation of Bank Permata. Through the 2 representatives in the Board of Directors, Michael A. Coye who was the Chief Risk Officer of SCB Taiwan; and Sandeep K. Jain who is the Regional Chief Financial Offer of SCB London.

Bank Permata Managing Obstacles and Financial Metrics

Profitability – Concentration on cyclical sector (manufacturing and industrial)
As a whole, Bank Permata’s profitability has been in declining trend in the past few years. Due to tightening net interest margin (NIM) and high cost-to-income (CIT).

The Group’s earning profile is highly dependence on net interest income, which accounted for 80% of its revenue. Net profit increased by 26.1% yoy to MYR1.37tn in FYE13 on the back of strong loan growth of 26.3% yoy. However moderated by decreasing net interest margin (NIM) to 4.2% in FYE13.

Loan growth in the past few years were robust with 4y-CAGR of 31% from 2009 to 2013. Stronger than industry loan growth of 4y-CAGR of 23%. However, intense competition causing the NIM to moderate. In the last few years from 5.7% in 2009 declined to 3.5% in 2Q14. Meanwhile, Bank Permata’s operating cost-to- operating income ratio is higher industry average. Due to its smaller scale compared to other big players.

The Bank’s bottomline for 2Q14 were affect by higher impairment charge of IDR325bn (2Q13: IDR175bn). Weaker asset quality particularly in manufacturing, mining and excavation sector. As a result, first half PBT dropped by 2.2% yoy to IDR800m compared to IDR817m in previous corresponding quarter.

Bank Permata Managing Obstacles and Capitalization

Capitalization – Well-capitalized through support from the parent
The Bank’s capitalization benefits from the support of both SCB and Astra, as demonstrated in the past. Both of the parent companies fully supported the Bank’s capital raising activities through right issues from time to time. Where in the past 3 years Bank Permata has raised a total of IDR5.49tn new capital. With the total equity increased to IDR16tn in 2Q14 from IDR8tn in 2010.

The latest capital injection of IDR1.5tn in January was to acquire 25% stake in PT Astra Sedaya Finance (ASF). An automotive financing arm under Astra Group. Bank Permata is well capitalize with Tier-1 ratio of 9.4% in 2Q14. Slightly improved from 9.2% in 2013 subsequent to the capital injection. High growth in the past years dragged the total capital downward to 13.9% in 2Q14; sufficient but still below industry average of 19.5%.

Bank Permata Managing Obstacles and  Asset Quality

Since the involvement of SCB in Bank Permata’s management. As much as two representatives on Board of Directors with experience in finance and risk. The Bank’s asset quality has been improving. Gross impaired loans recovered from 4.0% in 2009 to 1.0% in 1Q14, one of the best in the industry.

However, difficult economic condition in Indonesia, stringent lending measures. High interest rates environment moderated the asset quality to 1.5% of NPL in 2Q14. Mainly brought up by the weakening loan quality in manufacturing, mining and excavation segment. As a result, provisioning reserves dropped to 76.9% as a percentage of NPL.

Nevertheless, we view that Bank Permata has adequate loss absorption capability given its 1) still strong profitability (2Q14 NIM: 3.5%); 2) sufficient capitalization (2Q14 Tier-1: 9.4%); and 3) perceive support from its strong shareholders.

Funding – Liquidity supported by parent companies
Bank Permata has relatively high loan-to-deposit ratio of 91% in 2Q14. Given its robust loan growth in the last few years, but still inline with industry average. However, the Bank trails other domestic players in securing low cost deposits (CASA). CASA made up 33% of the deposits base as at 2Q14, lower than industry average of 54%.

Nonetheless, we in view that its modest funding and liquidity profiles are support by the parent companies. Where SCB and Astra in the past had consistently injecting capital through right issues and subscribing to Bank Permata bonds. Include the USD100m MTN in 2009, IDR700bn MTN in 2010 and IDR1.75tn subordinated bonds in 2011. Recently, Bank Permata issue IDR1.4tn senior bonds. Followed, IDR860bn subordinated bond for loan expansion and partially finance the purchase of ASF.

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