Indonesia’s Sharia Banking Powerhouse

We initiate coverage of Bank Syariah Indonesia (BRIS) with a BUY rating and a TP of IDR 2,200 per share, implying a multiple of 2.4x 2024PBV. BRIS is the largest Sharia bank in Indonesia, with IDR 222tn of outstanding financing as of June-23 (+16% YoY), representing approximately 22% of Indonesia’s Sharia banking industry. In our opinion, BRIS still has lots of growth opportunities in Indonesia, given the rather low Sharia banking penetration in the country (3.9% of total bank loans) despite the fact that Indonesia has the world's largest Muslim population. In the future, the company will concentrate on the consumer segment, particularly payroll loans, as the company still has space to expand given its high savings customer base (19 million as of June-23). Despite the increase in its CoF in 2Q23 from 1.57% to 2%, BRIS still has the second-lowest CoF among Indonesian banks, behind BBCA. We estimate that BRIS' total disbursed financing will reach IDR 315tn in 2025F (a three-year CAGR of 15%), while its earnings will reach IDR 7.6tn (a three-year CAGR of 21.2%).

Significant opportunity to deepen Sharia banking penetration. In terms of Sharia banking penetration, Indonesia is ranked as one of the least penetrated countries compared to other Muslim-majority countries, with Sharia banks accounting for only 7.2% of total bank assets (Kuwait: ~49%, Saudi Arabia: ~63%, Qatar: ~27%, UAE: ~24%, Malaysia: ~30%). Due to the low penetration rate, we believe Sharia banks have lots of room to grow in Indonesia. Also, OJK’s banking statistics show that since 2019, Sharia banks consistently outperformed conventional banks in terms of financing growth, boasting a 5-year CAGR of +15.3% (conventional banks: +6.0%).

 

BRIS’ main focus going forward. BRIS will continue to focus on maintaining solid financing growth over the next few years and on the consumer segment, specifically payroll loans. Despite the fact that its FDR reached 88% in June-23 compared to 78% in the same period last year, we believe the ratio will improve in the following quarters, as savings will gradually return to the bank since it has improved its systems and cybersecurity to ensure that a "cyber attack", like the one happened in May 2023, will not occur again in the future. We believe that the company's NPF coverage of 190% (as of June-23) is adequate, as the company has been able to keep the NPF from its new business below 0.5% compared to 5.5% from its legacy business. It is important to note that BRIS’ new business accounts for approximately 64% of total financing as of June-23, and it will continue to experience substantial growth over the next few years, bringing its contribution to more than 80% by 2025F, according to our estimates. We anticipate that NPF will continue to improve, thereby reducing CoC in the future.

Initiate with BUY and a TP of IDR 2,200/share. Using the DuPont method and the following assumptions: ROE of 17%, risk-free rate of 6.75%, long-term growth of 3%, and beta of 1.1x, we gave BRIS a TP of IDR 2,200 per share, implying a multiple of 2.4x 2024PBV. In our opinion, BRIS still has lots of growth opportunities in Indonesia, given the rather low Sharia banking penetration in the country (3.9% of total bank loans) despite the fact that Indonesia has the world's largest Muslim population. Risks to our projection include slower-than-expected financing growth, deteriorating asset quality due to aggressive financing growth (which will lead to a higher CoC), and a higher-than-expected CoF (which will lead to a lower NIM).