Deteriorating Credit Quality Will Intensify Digital Competition

Key Takeaways

• Prolonged weakness in micro lending, digital disruption, and overexposure to rural segments threaten profitability, growth, and long-term competitiveness.
  
• Weak revenue diversification and climate-related risks expose the bank to ongoing asset quality pressures and elevated credit loss risk.
  
• Expansion of digital banking, diversified funding, targeted credit growth, and improved risk management strengthen earnings resilience and reduce reliance on traditional lending.

Catalysts

Provides various banking products and services in Indonesia and internationally.

• The persistent negative trajectory in micro loan growth, driven by deliberate slowdowns to address asset quality and legacy portfolio contamination, signals that Bank Rakyat Indonesia faces a long-term contraction in its core revenue-generating segment, with management warning it may take at least two more years before any sustainable recovery in micro lending begins. This stagnation threatens group-level loan book expansion and top-line revenue growth.
  
• Despite years of investment in digital transformation, intensifying competition from nimble, digital-first banks and fintechs is accelerating the erosion of BRI's market share in both lending and payments, especially as merchant business outlets and digital merchant numbers have shrunk by more than twenty percent year-on-year. This digital disruption not only limits future fee-based income growth but also risks long-term relevance and competitiveness, ultimately compressing operating margins.
  
• Overexposure to the rural and lower-income segments, combined with an aging demographic and accelerating urban migration, has already led to deteriorating credit quality. Elevated cost of credit (above three percent) and high non-performing loan ratios in core portfolios remain structurally unresolved, suggesting that net margins and earnings will be under pressure as provision and write-off expenses persistently drain profitability.
  
• Revenue diversification remains weak as BRI is unable to demonstrate consistent traction in non-interest income streams due to both macroeconomic softness and regulatory/accounting changes, such as the implementation of IFRS 17 that resulted in a seventy percent decline in net premium income, and a heavy reliance on short-term fiscal programs, undermining long-term earnings resilience.
  
• Greater climate-related risks and ongoing macroeconomic instability in Indonesia threaten BRI's rural loan book, posing ongoing and increasing risk of credit losses and forcing the bank to maintain loan loss reserves significantly above historical averages. This elevated risk profile, particularly in agriculture and MSME lending, exposes Bank Rakyat Indonesia to significant downside for its asset quality and capital ratios, challenging both capital adequacy and future growth for the foreseeable future.

Bank Rakyat Indonesia (Persero) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bank Rakyat 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 Rakyat Indonesia (Persero)'s revenue will grow by 22.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 42.4% today to 26.1% in 3 years time.
• The bearish analysts expect earnings to reach IDR 63566.2 billion (and earnings per share of IDR 421.35) by about September 2028, up from IDR 56729.7 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 11.5x on those 2028 earnings, up from 10.3x today. This future PE is lower than the current PE for the ID Banks industry at 16.3x.
• 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 12.33%, as per the Simply Wall St company report.

Bank Rakyat Indonesia (Persero) Future Earnings Per Share Growth

Risks

• The sustained growth of digital banking channels, including the BRIMO app and adoption by both retail and business customers, demonstrates strong improvement in transaction volume and user engagement, which can drive fee-based income and help support net profit margins going forward.
  
• Successful diversification of the funding franchise through CASA growth and targeting emerging affluent customers has resulted in a high CASA ratio above historical levels and robust deposit growth, lowering the cost of funds and supporting net interest margin resilience over the long term.
  
• Government spending and targeted social and MSME assistance programs are anticipated to accelerate in the coming years, fueling credit demand and supporting loan growth, which could result in higher revenues and earnings.
  
• Strategic transformation efforts in risk management, underwriting, and human capital development are already yielding improvements in asset quality, including declining loan at risk ratios and nonperforming loans, which can help reduce credit costs and stabilize profitability.
  
• Rapid recovery in non-interest income streams, such as gold sales and higher transactional activity from Pegadaian and PNM subsidiaries, boosts revenue diversification and earnings resilience, reducing dependence on traditional lending for future profitability.

Valuation

• The assumed bearish price target for Bank Rakyat Indonesia (Persero) is IDR3434.11, which represents two standard deviations below the consensus price target of IDR4505.29. This valuation is based on what can be assumed as the expectations of Bank Rakyat 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 IDR5400.0, and the most bearish reporting a price target of just IDR3340.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR243653.7 billion, earnings will come to IDR63566.2 billion, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 12.3%.
• Given the current share price of IDR3880.0, the bearish analyst price target of IDR3434.11 is 13.0% 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.