Shariah Compliant Banking in Indonesia: A Comprehensive Analysis

Broker Name: PT Maybank Sekuritas Indonesia

Date of Report: December 2, 2024

Introduction

The Indonesian banking landscape is evolving with a strong emphasis on Shariah-compliant frameworks. Bank Syariah Indonesia (BRIS IJ) stands at the forefront of this transformation, showcasing remarkable growth and a promising trajectory within the Shariah banking sector.

Bank Syariah Indonesia: A Deep Dive Analysis

Robust Earnings Growth

Bank Syariah Indonesia (BRIS IJ) has exhibited robust earnings growth, maintaining a “BUY” recommendation with a target price (TP) of IDR3,600, based on a 3.2x FY25E P/BV. This optimism stems from the bank’s strong earnings growth trajectory, extensive financing growth, and expansion in its gold business, all of which contribute to improved returns on equity (ROE). However, potential risks include a sluggish Syariah economy and a slowdown in financing growth.

Financial Performance

For the first ten months of 2024, BRIS reported a net profit of IDR5.1 trillion, marking a 21% year-on-year increase, achieving 82% of the full-year forecast. The earnings uptick was driven primarily by reduced provision costs and a healthy improvement in PPOP (pre-provision operating profit). Despite a slight weakening in the Net Interest Margin (NIM) at 5.4%, improved fee-based income helped offset this shortfall. The downward trend in credit costs, expected to remain below 1.0% for the rest of the year, further bolsters BRIS’s financial health.

Financing and Deposit Growth

BRIS’s financing grew by 16.8% year-on-year as of October 2024, complemented by a 14.0% growth in deposits. The bank anticipates that consumer financing, particularly payroll-based and gold installments, will drive this growth. By targeting lower-risk segments, BRIS aims to maintain manageable credit costs and mitigate the risk of significant increases.

Outlook and Strategic Initiatives

The outlook for BRIS remains promising, with expectations of sustained growth driven by robust financing and enhanced fee-based income. The bank’s focus on consumer financing is set to yield higher returns, while funding costs are anticipated to decrease as cheaper funding sources, such as Hajj funds, are tapped. Additionally, the gold pawning and insurance partnership are poised to boost fee-based income further, propelling future earnings growth.

Key Financial Metrics and Ratios

BRIS’s financial metrics reflect its strong market position and growth prospects. The bank’s core P/E ratios are projected to decrease from 19.4x in FY24E to 12.3x in FY26E, while the P/BV is expected to decline from 3.0x to 2.2x over the same period. The net dividend yield is also forecasted to rise, reaching 2.9% by FY26E. These metrics underscore BRIS’s potential for delivering substantial shareholder returns.

ESG and Risk Management

As a leader in the Syariah financing industry, BRIS has dedicated at least 30% of its financing to sustainable initiatives, focusing on micro, small, and medium enterprises (MSMEs) and environmentally friendly businesses. The bank’s commitment to ESG (Environmental, Social, and Governance) practices is evident in its efforts to reduce its carbon footprint and promote green financing. BRIS also maintains strong corporate governance standards, with significant shareholdings by state-owned enterprises and government oversight.

Challenges and Opportunities

BRIS faces several challenges, including potential government interventions and the need to clean up legacy financing issues. However, opportunities for growth abound, particularly if the Syariah economy expands faster than anticipated. The bank’s strategic initiatives to improve financing quality and enhance profitability position it well for future success.

Conclusion

Bank Syariah Indonesia’s comprehensive strategy and robust financial performance make it a standout player in Indonesia’s evolving banking sector. With its focus on sustainable growth, strong governance, and strategic expansion, BRIS is well-positioned to capitalize on the opportunities within the Shariah-compliant banking landscape. Investors are encouraged to consider the bank’s promising outlook and potential for significant returns.