Digital Challengers And Strict ESG Rules Will Weaken Banking Stability

Key Takeaways

• The rise of fintech competition and digital banking threatens BNI's customer base, revenue growth, and ability to attract younger, tech-savvy clients.
  
• Regulatory burdens, tightening margins, and macroeconomic risks may increase costs, slow loan growth, and jeopardize long-term profits and asset quality.
  
• Digital transformation, strengthened risk management, and stable funding position the bank to achieve resilient asset quality, stable earnings, and long-term growth amid favorable economic conditions.

Catalysts

Provides various banking products and services in Indonesia, rest of Asia, New York, and Europe.

• The rapid advancement and adoption of digital banking services and fintech competitors in Indonesia threatens to erode BNI's traditional customer base and limit its capacity to generate fee-based income, which could significantly weaken long-term revenue growth.
  
• Intensifying price competition and the emergence of non-bank financial services such as e-wallets and peer-to-peer lending are expected to compress net interest margins further, especially at a time when system-wide money supply growth is already slowing and funding costs remain elevated, putting persistent downward pressure on profitability.
  
• Stricter global and domestic regulatory standards, particularly the enforcement of ESG criteria, are likely to raise compliance costs and force BNI to tighten lending standards, leading to slower loan growth and reduced earnings potential over the coming years.
  
• Macroeconomic risks, including potential climate-related disasters and increased volatility in global trade and currency markets, could result in higher non-performing loans and more volatile earnings, undermining the stability of asset quality and future returns.
  
• BNI's lagging pace in digital transformation relative to more agile fintechs and digital banks risks losing younger and tech-savvy customers, resulting in stagnating deposit and loan growth that may limit improvements in revenues and constrain long-term profitability.

Bank Negara Indonesia (Persero) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bank Negara Indonesia (Persero) compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bank Negara Indonesia (Persero)'s revenue will grow by 14.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 41.5% today to 31.7% in 3 years time.
• The bearish analysts expect earnings to reach IDR 24063.8 billion (and earnings per share of IDR 588.96) by about August 2028, up from IDR 20866.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from 7.9x today. This future PE is lower than the current PE for the ID Banks industry at 16.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.36%, as per the Simply Wall St company report.

Bank Negara Indonesia (Persero) Future Earnings Per Share Growth

Risks

• The bank's continued digital transformation-evidenced by strong user growth in both the BNI Direct platform for corporates and the wondr app for retail customers-demonstrates success in lowering funding costs and deepening customer engagement, which could support long-term improvement in net interest margins and deposit growth.
  
• Strengthened risk management, improved underwriting standards, declining loan at risk ratios, and above-industry average provisioning mean that asset quality is likely to remain resilient, reducing the probability of unexpected credit losses impacting net income in the years ahead.
  
• The bank's shift in loan composition toward corporate and consumer segments with historically stable asset quality, combined with robust capital levels (capital adequacy ratio of 20% versus the regulatory minimum), indicates strong loss absorption capacity and the ability to support lending growth, providing stability to earnings and shareholder returns.
  
• A cautious but proactive approach to liquidity and funding-reflected in stable CASA ratios, conservative loan-to-deposit management, and diversified funding strategies-positions the bank to manage periods of market volatility without significant negative impact on funding costs or revenue consistency.
  
• Indonesia's economic fundamentals, with projected GDP growth of 5%, limited direct exposure to global trade shocks, and a growing middle class, create a favorable backdrop for credit demand and savings mobilization, underpinning BNI's long-term revenue and profit outlook.

Valuation

• The assumed bearish price target for Bank Negara Indonesia (Persero) is IDR3822.55, which represents two standard deviations below the consensus price target of IDR5158.91. This valuation is based on what can be assumed as the expectations of Bank Negara Indonesia (Persero)'s future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of IDR6100.0, and the most bearish reporting a price target of just IDR3500.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR75968.8 billion, earnings will come to IDR24063.8 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 14.4%.
• Given the current share price of IDR4430.0, the bearish analyst price target of IDR3822.55 is 15.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.