Digital Disruption Will Erode Margins Amid Credit Risks In Indonesia

Key Takeaways

• Accelerating digital disruption and fintech competition threaten Bank Mandiri's fee income, relevance, and require costly technological investments to defend market share.
  
• Increased credit, regulatory, and sustainability risks expose the bank to earnings volatility, higher compliance costs, and margin compression.
  
• Digital innovation, improved asset quality, leader in loan and deposit growth, operational efficiency, and supportive macro trends position Bank Mandiri for sustainable expansion and market strength.

Catalysts

Provides various banking products and services to individuals and businesses in Indonesia, Singapore, Hong Kong, Timor Leste, Shanghai, Malaysia, England, and the Cayman Islands.

• Bank Mandiri could face declining revenue and margin pressure as the rapid acceleration of digital disruption in Indonesia enables fintech and non-bank competitors to bypass traditional banking channels, forcing heavy investments in technology just to defend existing market share.
  
• The ongoing shift toward a cashless and decentralized economy, including increased adoption of digital wallets and blockchain-based solutions, threatens to erode transaction-based fee income and diminish the bank's relevance in many core lines of business.
  
• Rising reliance on net interest income, coupled with intense competition and margin compression from both domestic and regional banks as well as fintechs, makes Mandiri's overall revenue base more volatile and susceptible to economic downturns and low rate environments.
  
• Persistent exposure to vulnerable SME and state-linked borrowers, despite recent improvements, leaves Bank Mandiri at risk of credit quality deterioration and higher loan loss provisions over time, ultimately driving greater earnings volatility.
  
• Stricter regulatory requirements and growing sustainability and climate-related risks in the Indonesian market have the potential to raise compliance costs, restrict lending in key sectors, and inflate risk-weighted assets, pressuring both future net profit growth and return on equity.

Bank Mandiri (Persero) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bank Mandiri (Persero) compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bank Mandiri (Persero)'s revenue will grow by 9.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 40.9% today to 31.3% in 3 years time.
• The bearish analysts expect earnings to reach IDR 55765.6 billion (and earnings per share of IDR 595.89) by about September 2028, down from IDR 56277.8 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 9.5x on those 2028 earnings, up from 7.3x 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 14.59%, as per the Simply Wall St company report.

Bank Mandiri (Persero) Future Earnings Per Share Growth

Risks

• The ongoing acceleration of digital and ecosystem strategies such as the Livin' and Kopra platforms is driving strong growth in digital transaction volumes and fee-based income, with digital fees and recurring non-interest income expanding at double-digit rates, supporting revenue diversification and net margins.
  
• Asset quality has consistently improved, with non-performing loan ratios declining to historic lows, loan-at-risk coverage ratios rising, and prudent risk management practices translating to stable or improving credit costs, thereby sustaining resilient earnings and profitability.
  
• Bank Mandiri continues to outpace the broader industry in both loan and deposit growth, leveraging a robust value chain ecosystem strategy that deepens corporate relationships and expands into new customer segments, providing a strong foundation for long-term revenue growth and market share gains.
  
• The bank's ongoing digital transformation has led to significant improvements in operational efficiency, with its cost-to-income ratio improving to 35 percent at the bank-only level and 40 percent on a consolidated basis, driving higher net margins and supporting scalable profitability as the business expands.
  
• Indonesia's favorable macroeconomic trends, including rising GDP growth, stable inflation, increasing financial inclusion, and government initiatives to boost liquidity and support the banking sector, create a supportive environment for sustainable revenue and earnings expansion for Bank Mandiri over the long term.

Valuation

• The assumed bearish price target for Bank Mandiri (Persero) is IDR3754.21, which represents two standard deviations below the consensus price target of IDR5899.41. This valuation is based on what can be assumed as the expectations of Bank Mandiri (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 IDR7800.0, and the most bearish reporting a price target of just IDR3600.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be IDR178018.8 billion, earnings will come to IDR55765.6 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 14.6%.
• Given the current share price of IDR4400.0, the bearish analyst price target of IDR3754.21 is 17.2% lower.
• 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.