A More Normalized NPL amidst Aggressive Loan Growth
2Q22 : earnings missed our expectation due to surging provisioning expense...
Bank Jago (ARTO) reported a net income of IDR10 bn in 2Q22. Earnings contracted by -47% QoQ on the back of provisioning expense jump (+82% QoQ) along with declining asset quality as gross NPL increased by +120 bps QoQ to 2.7% in Jun-22. Surging NPL was largely driven by its sharia business. Management has stated that previous NPL of 1.5% in Mar-22 was not sustainable and the last figure is said to be more normalized NPL. However, despite weakening asset quality in 2Q22, ARTO’s NPL was still considerably lower than industry average of ~3.0%. In addition, we also see a prudent risk management as ARTO’s risk adjusted margin was reported at ~9%.
...albeit growth story to remain intact....
ARTO’s funding and lending balance continued to record an impressive growth. On the funding side, customer deposit grew +45.2% QoQ/+259% YoY in Jun-22 along with the additional ~1 mn KYC-ed customers on a quarterly basis. The success story of improvement in registration with full roll-out and fine- tuning of eKYC has lowered -75% time taken customer verification and adding 300-400k new, fully-KYCed users/month in 2Q22 (vs 150-200k/month in 4Q21). We estimate +159% YoY increase in customer deposit for FY22E, higher than our previous forecast of +78% YoY as we hope an improvement in IT infrastructure and more integration to GoTo’s ecosystem to be a key upside catalyst. Meanwhile on the lending side, as ARTO operates a non-direct lending scheme, adding new lending partners such as Carsome has boosted its loan growth (+13% QoQ/+177% YoY). Going forward, we project ARTO’s lending balance to book 86% YoY (vs +63% YoY previous forecast) to ~IDR10tn (gross loan), as we expect : 1) more aggressive loan disbursement in 2H22 and 2) enhancing partnerships through its lending partners.
....yet we trim our FY22E earning forecast for ARTO...
Going forward, we estimate ARTO’s Net Interest Income to grow at an annual rate of +134% in FY22E, primarily driven by : 1) bank’s loan portfolio high exposure to consumption & MSME credits yielding ~16% and 2) lower CoF at 2.7% in-line with strengthening CASA mix. Note that ARTO’s CASA portion accounted for 63% of customer deposit as of Jun-22, a level above management convenience at ~50% in early phase of digital banking journey. However, due to a more normalized NPL (assuming the gross figure at 2.3%) and our conservative estimate of credit cost at 4.0% amidst aggressive loan channeling, as well as potentially higher operational cost in 2H22, we trim our earning forecast for ARTO to IDR184bn in FY22E (-38% from our previous FY22E earning projection).
The plane flies up high with 2 growth engines
Expect +191% FY20-23E CAGR for loan growth due to : 1) a more integrated digital ecosystem with GoTo and 2) potential partnership with BFIN IJ. As the digital bank operation continue to unfold, we also see a clear path towards establishing more integrated ecosystem with GoTo. As at end of Jun-22, GoTo’s placement in ARTO jumped to IDR1.45tn (vs IDR303bn in Dec-21). Management has confirmed that GoTo’s placement is for funding and operational account. Interestingly, GoTo also announced a possible collaboration with ARTO last Jun-22. The main focus from this opportunity is to provide merchant businesses (MSMEs) solution. With this possible partnership we expect ARTO could have access on low cost funding as well as broaden its loan portfolio mix. In addition, on July 7, 2022, Jerry Ng also obtained approval from OJK on the fit and proper test as a controller of multi-finance company focusing on auto- financing BFIN. This should open up possibility for joint-financing scheme to be enacted as a solution to keep loan expansion strategy while meeting the banking regulation of maximum credit disbursement (BMPK).
Maintain BUY rating with lower TP of IDR15,700
We derived our valuation using Customer Lifetime Value (CLV) assuming 12mn customers by the end of FY23E and adjusting our forecast on loan yield at 16.8% (vs 15.0% previously); CoF at 3.3% (vs 5.0% previously); credit cost at 3.0% (vs 2.5% previously) and operational cost to income at 45.0% (vs 35.0% previously) arriving at IDR15,700/share implying 25.7x/23.7x FY22E/FY23E P/B. Key downside risks include : 1) deteriorating asset quality; 2) slower execution of ecosystem integration; 3) higher operational and IT infra investment cost.
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