BUY Bank Jago

www.danareksa.com See important disclosure at the back of this report 1

Equity Research Company Update

Friday,01 October 2021

Bank Jago (ARTO IJ) BUY

Initiation Way to go!

Within the digital banking landscape, ARTO is well placed to run ahead of its peers backed by: 1) its partnership with the GoTo digital ecosystem, 2) its solid and knowledgeable management team, and 3) its focus on the mass-market segment that should translate into higher NIMs. GoTo as one of ARTO’s non-controlling shareholders will help the bank through monetization of the sizeable database to support digital business expansion. Combined with its experienced management team and solid CAR post rights issue, we assume 102.1% loans growth resulting in a 6.9% NIM next year. All in all, the bottom line will turn positive at IDR302bn in FY22F based on our model. The digital ecosystem is the key factor. We believe the right digital ecosystem and a definitive database are the two components for digital banks to succeed. With the massive and aggressive e-commerce platforms, many digital banks are looking to tap into these ecosystems due to their sizable databases. Nonetheless, the bank would also need to select which data can be used in the credit scoring model. This requires decent data analytics with the right personnel in place along with a knowledgeable management team as the approval time is a crucial factor in the mass-market segment. Solid and well-experienced management team. ARTO’s management team has proven experience in the mass market segment, from the Danamon Simpan Pinjam (DSP) era to BTPN’s Jenius digital savings initiative. Its shareholders will allow ARTO to reach more customers across different sectors and segments, from the GoTo digital ecosystem to sharia-based P2P lending. At the same time, the dominance of millennials as ARTO’s employees should help the bank to continuously develop and launch innovative digital products and services.

Focus on the mass-market segment. The c.64.0mn MSME business owners in Indonesia with knowledgeable teams are the low hanging fruit for ARTO. By partnering with the right digital ecosystem, ARTO can penetrate the high-yield loan segments, i.e. BNPL, merchants financing, and others. Combined with its low savings interest rate compared to its peers, NIM should touch 6.9% next year. All in all, FY22F’s net profits should reach IDR302bn based on our forecast.

Initiate coverage with a BUY, TP of IDR20,000. We utilize lifetime value as the valuation basis on ARTO assuming a total of 11mn customers. Downside risks to our TP are: 1) execution delays, 2) lower-than-expected customer acquisition, 3) potential Government intervention, 4) reversal in the policy rate that might impact its blended CoF, and 5) the non-exclusive partnership with GoTo and other possible digital ecosystems.

Last price (IDR) 15,100

Target Price (IDR) 20,000

Upside/Downside +32.5%

Previous Target Price (IDR) 0

Stock Statistics

Sector Banking

Bloomberg Ticker ARTO IJ

No of Shrs (mn) 13,856

Mkt. Cap (IDRbn/USDmn) 209,229/14,659

Avg. daily T/O (IDRbn/USDmn) 277.6/19.4

Major shareholders (%)

PT Metamorfosis Ekosistem Indonesia 29.8

PT Dompet Karya Anak Bangsa 21.4

Estimated free float 48.8

EPS Consensus (IDR)

2021F 2022F 2023F

Danareksa (1.5) 23.8 47.2

Consensus 1.4 25.1 68.5

Danareksa/Cons (205.6) (5.1) (31.1)

ARTO relative to JCI Index

Source : Bloomberg

Eka Savitri

(62-21) 5091 4100 ext.3506

[email protected]

Andreas Kenny

(62-21) 5091 4100 ext.3509

[email protected]

Key Financials

Year to 31 Dec 2019A 2020A 2021F 2022F 2023F

PPOP (IDRbn) (26) (148) 39 528 973

Net profit (IDRbn) (122) (190) (19) 302 599

EPS (IDR) (101.1) (22.5) (1.5) 23.8 47.2

EPS growth (%) 423.7 (77.8) (93.3) (1,682.6) 98.4

BVPS (IDR) 564.7 146.2 650.2 674.0 721.3

PER (x) (149.3) (671.5) (10,037.7) 634.3 319.7

PBV (x) 26.7 103.3 23.2 22.4 20.9

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

ROAE (%) (30.6) (19.8) (0.4) 3.6 6.8

Source : ARTO, Danareksa Estimates


Exhibit 1. Loans and Growth Exhibit 2. Net Interest Income and Growth

Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates

Exhibit 3. NIM and LDR Exhibit 4. NPLs

Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates


The digital ecosystem is the key factor The pandemic has expedited the transition to online-based transactions

The COVID-19 pandemic which broke out in 2020 has led many people, particularly those who live in urban and suburban areas, to limit their daily activities. Activities including studying, working, and shopping for daily needs as well as banking transactions have mostly been done in the home. This has led to a shift from an offline to online (O2O) business model in several sectors such as retail, food and beverages (F&B), and banks.

Additionally, the e-commerce players have also played a greater role given the change in consumer behavior, especially of those who live in first and second tier cities. This is partly due to their aggressive marketing gimmicks, with cashbacks and free delivery fees to name but a few. Tokopedia and Shopee are two main players that currently dominate the e-commerce space, offering a wide range of products and services. Both names claim to have more than 100 mn internet visits in the past six months (refer to Exhibit 1). Bukalapak, on the other hand, as the only e-commerce player already listed on the IDX, booked c.31.9mn internet visits in the last six months as the company focuses more on leveraging and monetizing its 5.0mn warung partners.

Exhibit 5: Key e-commerce players in Indonesia

Company General info Shareholders Traffic before pandemic Internet visits July 2021 (Last

6 months)

Bukalapak # of users: 90mn

Avg daily transactions: IDR2mn

GMV: USD3bn (2020)

TPV: IDR22.88tn

Employees: 2000+

PT Kreatif Media Karya (23.93%), API 9hong Kong Investment Limited (13.05%), Archipelago Investment Pte. Ltd. (9.45%), Achmad Zaky Syaifudin (4.32%), Muhammad Fajrin Rasyid (2.64%), New Hope OCA Limited (3.16%). Batavia Incubator Pte. Ltd (2.47%), Mirae Asset-Naver Asia Growth Investment Pte. Ltd (1.80%), UBS AG, London Branch (1.86%), Willix Halim (1.40%), Others (37.32%)

70 million active users, 4.5 SME sellers, 131.7 million visits (2019)

31.9 Mn

Tokopedia # of users: 100mn GMV: USD14bn (2020) Employees: 4,700 (2019)

Softbank (35.35%), Alibaba Group (28.25%), Radiant (10.6%), Sequoia India (8.05%), William Tanuwijaya (4.66%), Anderson Investments (3.28%), Leontinus Alpha Edison (1.9%), Google (1.64%), East Ventures (1.08%), Dream Fund (1%)

Jan 2020: 7.2mn merchants, 90mn users

126mn

Shopee # of users: 93mn (2020) Avg daily transactions: IDR2.8mn GMV: USD14.2bn (2020) Employees: 20,000+

Sea Group shareholders Tencent: 39.7% Blue Dolphins Venture: 15% Forrest Li: 20% Gang Ye: 10%

2019: 55.9mn monthly users 141.6mn

Blibli # of users: 18.5mn Djarum Group, GDP Ventures 2019: 15-20mn monthly active users

18.3mn

Lazada # of users: 30.5mn

GMV: USD4.5bn (2020)

Alibaba, Temasek Holdings, Verlinvest, Rocket Internet, Kinnnevik AB, Tesco, Access Industries, HV Capital, TEC Ventures, Summit Partners

Q4 2018: 36.4mn monthly visits 28.5mn

Source: BRI Danareksa Sekuritas


Plenty of growth opportunities for financial institutions

The big e-commerce players which own sizeable databases of customers attract banks and fintech companies to partner with them as the involved parties will share the database. Using the first principles design (build from scratch), the digital banks focus more on the customers’ needs and utilize the customer database to create customized products and services. The large database is also the underlying asset for the banks to build a proper underwriting and internal credit scoring system using data analytics. Such an approach applies not only for the end-customers (individuals) but also the merchants, the logistics companies and individual couriers (if any), in our view.

At a more micro level, by tracking the transactions from upstream to downstream (end-customers) the digital banks can obtain a better understanding of the volumes, patterns in certain areas, average transaction ticket size and many other aspects that can be included in the parameters of an internal credit scoring system. For the merchants, the banks can estimate the turnover value per month as the basis to calculate the potential loans facility to be offered. The banks can then offer either invoice-based loans (PO based) or regular working capital loans.

For the retail/individual segment, the banks can easily provide Buy Now Pay Later (BNPL) options for transactions value above IDR1mn, for example. Indeed, the e-commerce platforms already offer this payment term with interest rates ranging from between 1.4%-5.25% per month with a maximum loans size of IDR3bn (refer to Exhibit 2). Currently, the e-commerce players are partnering with fintech, multifinance companies and banks for the products. With a relatively small ticket size (max IDR30.0mn) and short-term tenors (less than 12 months), a fast approval and disbursement process are the key factors to beat the pay later competition.

Exhibit 6: Lending products in a few e-commerce platforms

Company Feature name and partners

Maximum ticket size Maximum tenor (months)

Maximum lending rate per month (%)

Tokopedia Paylater (Kredivo) IDR3.0mn (basic)

IDR30.0mn (premium)

1 (basic)

12 (premium)

0 (basic)

2.6 (premium)

Paylater (BRI Ceria) IDR20.0mn 12 1.4

Pinjaman Online (BFIN, Julo Finance, Koinworks, Adira Finane, Tunaiku)

IDR3.0bn 96 Not disclosed

Dana instan (Kredit Pintar, Finmas)

IDR2.4mn 3 5.25

Shopee SpayLater for goods purchase

IDR50.0mn 12 2.95

Spinjam for instant loans IDR9.0mn 12 2.95

Gojek GopayLater (Findaya) IDR3.0mn Not disclosed Fee starts from IDR10,000

GoModal (Findaya) Not disclosed (Merchants) Not disclosed Not disclosed



Collaborative type of partnership

An agile and lean structure with a high dependency on IT (including a proper credit scoring system)

and fast approval process are the key factors for exponential growth in the fintech industry, we

believe. As of September 2021, OJK recorded 107 legal fintech companies, already down from

August 2020’s 157 entities. We believe the prolonged pandemic is one of the reasons for the fewer

number of fintech players in recent months.

The key fintech players are Investree, Amartha, Uang Teman, Modalku, Indodana, Julo and Awan

Tunai, among others. Please also note that some fintech players have niche markets other than

consumption-based loans, i.e. TaniFund for agriculture and farmers, Edufund for education-oriented

needs, and Qazwa for sharia-based P2P lending. Nonetheless, we believe there will be less players

within the fintech industry going forward, particularly those which offer a non-unique value

proposition to customers and have a dull credit scoring system with weak support from

shareholders.

We also see that some multifinance companies are quite aggressive in tapping into the paylater

business, i.e. BFI Finance (BFIN IJ, NOT RATED) and Adira Finance (ADMF IJ, NOT RATED). Both

companies, we believe, aim to diversify their financing portfolios as well as to explore more business

opportunities and to gain more databases for internal credit scoring systems. We assume that

smaller multifinance companies with non-bank shareholders will be in higher risk territory due to

the threat from fintech companies.

Exhibit 7: Example of Paylater features in Tokopedia apps

Source: Tokopedia, BRI Danareksa Sekuritas


Exhibit 8: Digital banks comparison

Indicators ARTO AGRO BABP BBYB SEA BANK

Ecosystem Go-To BRI group

BRI Ventures portfolio, i.e. TaniHub, Payfazz, Haus!

MNC Group

P2P players, i.e. Kredit Pintar, Atome, Oriente

Akulaku

Alibaba’s investment portfolio, i.e. Lazada, Bukalapak, DANA

Shopee

Shareholders PT Metamorfosis Ekosistem Indonesia (29.8%)

Gojek (21.4%)

PT Bank Rakyat Indonesia (86.1%)

MNC Capital Indonesia (50.27%)

PT Akulaku Silvrr Indonesia (24.98%)

PT Gozco Capital (17.68%)

PT Danadipa Artha Indonesia (97.25%)

PT Koin Investama Indonesia (2.75%)

Specific target market

Merchants, gojek drivers, individual customers

Informal workers (freelancers, half-employed), merchants, suppliers

MNC Group’s pay TV subscribers, P2P players

Merchants, individual customers

Merchants, individual customers

# of potential users (mn)

11.0mn merchants

2.0mn drivers

100.0mn individual customers

4.5mn informal workers

1.0mn merchants

100k suppliers

250k branchless agents

10.0mn pay TV subscribers

30.5mn Lazada customers

90.0mn Bukalapak customers

93.0mn users

Potential products

Working capital loans for merchants

Multipurpose loans for drivers

Paylater for individual customers

Working capital loans for merchants/suppliers

Multipurpose loans for informal workers

Co-branding credit cards for individual customers

Multipurpose loans for customers of P2P partners





Current features

Deposits: Free transfer/e-wallet top up fee, multiple pockets

Lending: Biometrics recognition for account opening, instant approval

Deposits: fast account opening process with biometrics face recognition

Deposits: free transfer fee

Deposits: free transfer fee, high TD and savings rate (8.0% p.a)

Deposits: free transfer fee, high deposits rate (7.0% p.a.)

Source: Various resources, BRI Danareksa Sekuritas


Solid and well-experienced management team Decent track record in previous banks

ARTO’s BOC and BOD include many experienced members, mostly from BTPN (BTPN IJ, HOLD, TP

IDR3,200) pre SMBC as the controlling shareholders. Jerry Ng, the president commissioner, is the

key person behind the ARTO new business ventures. His previous experience at the management

level was in BTPN while he also worked at BDMN and BBCA. At the BOD level in ARTO, Kharim Siregar

and Arief Tandjung are two key personnel who have already worked with Jerry Ng for more than

ten years.

During the BTPN period, the team successfully diversified the bank’s business model from only a

focus on the pensions segment to also encompassing the micro loans segment. Such a strategy was

successful during that era as the team adopted the improved business model from Danamon Simpan

Pinjam (DSP). This business was solid as the Government’s KUR program had not yet been

introduced. As such, most of the financial metrics such as NIM, ROAA, and ROAE were superior than

those of its peers.

Exhibit 9: ARTO corporate structure

Source: ARTO

Exhibit 10: Key management team and respective prior experience

Key personnel Position in ARTO Previous experience

Jerry Ng President Commissioner • CEO of BTPN

• Deputy CEO of BDMN

Anika Faisal Commissioner • Director of Compliance in BTPN

• Director of Compliance in BTPN

Kharim Indra Gupta Siregar Chief Executive Officer (CEO) • Director of IT in BTPN

• Head of Business Support – Danamon Simpan Pinjam of BDMN

Arief Harris Tandjung Deputy CEO • CFO of BTPN

• Head of SME Banking Business of BDMN

Peterjan Van Nieuwenhuizen Director of digital banking • Head of Digital Banking of BTPN

Tjit Siat Fun Director of Compliance • Director of Compliance of DBS Bank Indonesia

Deddy Triyana Director of SME • CEO of ARTO

Source: ARTO

30%

12%

21%

9%

28% PT Metamorfosis EkosistemIndonesia (MEI)*

Wealth Track TechnologyLimited (WTT)*

PT Dompet Karya Anak Bangsa(DKAB)

GIC Private Limited (GIC)

Public


Implementing the improved business models in ARTO

BTPN’s micro loans faced a threat from the Government’s KUR program starting in 2014, resulting

in a moratorium of its micro loans as BTPN’s lending rate was not competitive with the KUR rate

(recall that the KUR lending rate stood at 9% when first introduced vs BTPN’s micro lending rate at

above 19%). However, the management team came out with its new business initiative while

maintaining the high-yield segment as its focus market through BTPN Syariah (BTPS IJ, BUY, TP

IDR3,500). BTPS taps the productive poor segment using the female group-lending based approach.

Jenius, BTPN’s digital deposits product, is another initiative by Jerry Ng and the team to capture

opportunities in the digital market and was launched in 2016. Jenius is considered to be a pioneering

digital banking product despite the account opening process that is still partly manual, i.e. BTPN

personnel come to the customer to collect and verify the personal information pre-opening of the

account. In the early phase, Jenius offered c.4% rate to attract new customers on the flexi saver

product. The management team has since learned, however, that such a strategy (premium rate) is

not sustainable to support business expansion in the future. Learning from these initiatives, ARTO’s

management team then implemented the improved business models on both lending and funding

activities in ARTO.

Exhibit 11: Key indicators on prior business initiatives by ARTO’s management team

Indicators BTPN BTPS ARTO

Key products Pension loans, micro loans, Jenius deposits

Ultra-micro (productive poor segment) Digital loans to individuals, merchants, P2P channels, digital savings with multi products offering

Competitive advantage

High-yield segment, premium deposits rate

High-yield segment, female group-based, premium individual deposits rate, sharia based

Partnership with digital ecosystem, custom

Threats Government’s KUR program on micro loans, aggressive SOE banks to tap the pension segment

Ultra-Micro Holding plan on BBRI with Pegadaian and PNM, agile P2P players

Agile and aggressive P2P players, other digital banks

Source: BTPN, BTPS, ARTO

ARTO adopted four business values to win in the digital banking space, namely:

1) Life centricity

2) Purposeful growth

3) Fearless creativity

4) Empowered agility

Based on those values, we believe ARTO should continuously develop digital products and services

to better serve its customers, be they individuals, merchants or P2P lending. With 62.3% of the

employees being below 40 years of age, ARTO is already equipped with internal talent that matches

its target market, i.e. the millennials tech savvy segment.


Focus on the mass-market segment The MSME segment is the low hanging fruit

Industry wise, the MSME segment is the backbone of Indonesia’s economic structure due to its

labour-intensive business model. MSME loans, however, only accounted for 18.5% of total industry

loans as of June 2021. We believe multi-finance and P2P are two main players in the MSME segment

supported by the fact that MSME businesses are usually still operated on an individual basis rather

than as a formal business entity. To tap the MSME segment, banks should have a different

underwriting and credit scoring system than that used for the consumer and corporate segments.

Additionally, by nature, MSME loans are usually marked by higher NPLs and relatively high overhead

costs. This also explains why only select conventional banks can survive and succeed in the MSME

market.

Given the management team’s experience in the mass-market segment, ARTO is tapping into the

MSME market. This is inline with GoTo’s business value to empower MSME business owners. By

partnering with GoTo, ARTO will have access to 2.0mn Gojek drivers, 11.0mn GoFood and Tokopedia

merchants, 20mn Gojek active users and 90mn Tokopedia active visitors. ARTO would benefit from

its partnership with GoTo, providing BNPL or revenue-based loans for the Gojek drivers. Going

forward, ARTO would also be able to expand its consumer loans to auto ownership loans as well as

mortgages in our view.

Exhibit 12: MSME loans and NPLs position

Source: OJK, BRI Danareksa Sekuritas

3,0

3,5

4,0

4,5

5,0

-

50

100

150

200

250

300

350

400

450

500

Dec

17

Mar

18

Jun

18

Sep

18

Dec

18

Mar

19

Jun

19

Sep

19

Dec

19

Mar

20

Jun

20

Sep

20

Dec

20

Mar

21

Jun

21

Micro (LHS) Small (LHS) Medium (LHS) NPL MSME (RHS)

IDRtn %


Exhibit 13: ARTO target market

Source: ARTO

To diversify the loans mix going forward, ARTO will tap the merchant segment, particularly given

the c.64.0mn micro and small business owners in Indonesia, the underserved segment that is

currently served by fintech, P2P and multi-finance players. As of June 2021, ARTO already

channelled loans to BFI Finance (BFIN IJ, NOT RATED) of IDR150bn (total facility of IDR600bn). We

also consider the potential of P2P channelled loans to its sister company, Amaan (sharia-based),

owned by the ultimate same shareholder, Jerry Ng. ARTO’s recently formed sharia unit would

penetrate the sharia segment through Amaan, focusing on the female group-based lending.

By utilizing a digital ecosystem, most of the digital banks have emphasised the adoption of a supply

chain approach on the merchant lending segment (PO-based). By doing so, ARTO can mitigate higher

NPLs going forward as it is guaranteed by the payment from customers. For the individual loans, the

lending product would usually be short-term and of a small ticket size. Given the short-term tenors

in both segments, the number of potential borrowers and the recurring loans are two crucial factors

to ensure sustainable business growth. Knowing the style of the management team in the previous

banks, ARTO will build a proper credit scoring system while expediting the approval time utilizing AI

data processing. By gaining a large database from the digital ecosystem, the bank can then build a

reliable credit scoring system and underwriting process.

On the funding side, learning from the previous experience in BTPN’s Jenius, ARTO currently does

not offer a great deposits rate to acquire new customers. Instead, ARTO offers multi-pocket

features, allowing customers to have several pockets that are customised to their needs. In addition,

the seamless connection with GoPay (no fee unlike GoPay top-up from other banks) is another key

feature to build more sustainable CASA deposits going forward in our view. Other than that, the

easiness and wide range of products (insurance, e-wallet, mutual funds, prepaid vouchers, etc)

would be ARTO’s value proposition to beat its competitors going forward.


Financial metrics 1H21 highlights

As of June 2021, ARTO booked 695.3% yoy loans growth mainly supported by channeling loans to

multifinance and P2P, such as IDR150bn loans to BFI Finance (BFIN IJ, NOT RATED). Post rights issue

in March 2021, the earnings assets mix was still mostly dominated by non-loans instruments. In

turn, this translated to a 5.0% NIM given the lower yields in non-loans earning assets (reverse repo

and government bonds instruments). Customer deposits, meanwhile, grew by 326.3% yoy in June

2021 driven by 328.2% yoy current account growth.

Profits and loss wise, the 1H21 bottom line was still in the red (albeit with less severe losses) given

the lending has started to have an impact at the interest income level. Given the bank’s strategy to

focus more on CASA deposits, the blended CoF provides some support for its NIM. Operating

expenses, meanwhile, still grew by 134.8% yoy as ARTO still allocated a certain budget on selective

expenses, i.e. personnel, IT and marketing/promotion. Those expenses are crucial as ARTO is still in

the growth phase mainly in acquiring new customers.

Exhibit 14: 1H21 highlights

FYE Dec (IDR bn) 2Q20 1Q21 2Q21

QoQ (%) YoY (%) 1H20 1H21

YoY (%)

Net interest income 17 33 106 215.5 538.5 27 139 422.6

Reported NIM (%) 4.4 7.7 4.0 4.1 5.0

Non-interest income 0 13 7 (43.7) 4,474.5 2 20 936.4

Non-II/Total income (%) 1.0 28.1 6.5 6.9 12.8

Operating income 17 47 113 142.7 576.5 29 160 458.1

Operating expenses (43) (78) (105) 35.1 146.4 (78) (183) 134.8

Cost-Income Ratio (%) 255.9 167.5 93.2 273.0 114.9

Pre-provisions profit (26) (31) 8 (124.5) (129.5) (49) (24) (52.0)

Provisions allowance 0 (7) (13) 89.5 (2,897.2) (1) (20) 1,254.4

Credit cost - annualised (bps)

(65) 253 304 107 261

Pretax profit (26) (38) (9) (77.3) (66.1) (51) (47) (8.1)

Tax - - - N/A N/A - - N/A

Effective tax rate (%) - - - - -

Net Profit (26) (38) (9) (77.3) (66.1) (51) (47) (8.1)

Other Key Data and Ratios

Gross loans 273 1,292 2,171 68.1 695.3 273 2,171 695.3

Customer deposits 405 958 1,726 80.2 326.3 405 1,726 326.3

Gross NPLs - - - N/A N/A - - N/A

Total assets 1,707 9,244 10,093 9.2 491.5 1,707 10,093 491.5

Shareholders' equity 1,272 8,143 8,118 (0.3) 538.3 1,272 8,118 538.3

ROAA (%) (7.0) (2.7) (0.4) (6.7) (1.5)

ROAE (%) (10.6) (3.3) (0.4) (16.0) (2.0)

LDR (%) 67.4 134.9 125.8 67.4 125.8

Gross NPLs ratio (%) - - - - -

CAR (%) 215.2 538.0 342.8 215.2 342.8

Source: ARTO, BRI Danareksa


Financial outlook Looking at ARTO’s prospects, we expect FY22F’s earnings to turn into profits of IDR302bn supported

by: 1) 102.1% yoy loans growth as we assume the digital lending product will already be launched

in 4Q21, 2) more sustainable CASA deposits coming from the customers’ stickiness despite the

potential reversal direction of the policy rate, 3) normalized operating expenses growth of 29.7%

yoy, and 4) stabilized credit costs of 204bps due to its mass-market core business.

OJK’s recent relaxation policy on the new products’ approval should pave the way for ARTO and

other banks to continuously innovate lending and deposits products. Capital, meanwhile, should not

be a concern in the next five years given the rights issue proceeds of IDR7.0tn received in March

2021. We also assume that ARTO will not distribute any dividends in the next two years as the bank

is still in the growth phase and needs to build sustainable capital through retained earnings.

Exhibit 15: ARTO loans and deposits growth


Exhibit 16: ARTO net interest income, PPOP and net income


-

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

Dec 19 Dec 20 Dec 21F Dec 22F Dec 23F Dec 24F

Loans CASA deposits TD

IDRbn

(500)

-

500

1.000

1.500

2.000

2.500

FY19 FY20 FY21F FY22F FY23F FY24F

Net int income PPOP Net income

IDRbn


Valuation Initiate coverage with a BUY and TP of IDR20,000

We initiate coverage on ARTO with a BUY recommendation and a TP of IDR20,000. We utilize

customer lifetime value as the appropriate valuation method on ARTO given its close proxy to the

digital ecosystem partnership. Our TP implies 29.7x 2022F PBV, justifiable due to its strong growth

potential amid the fast digital development and adoption in Indonesia.

Exhibit 17: Lifetime value method on ARTO

Individual Merchant

Avg loans (IDRmn) 5 80 Loan yields (%) 17.0 15.0 CoF (%) 3.8 3.8 CoC (%) 2.0 2.0 CIR (%) 35.0 35.0 Fee-income/total income (%) 15.0 15.0 Tax rate (%) 20.0 20.0 k 10% 10% g 7% 7% USD/IDR 14,500 14,500

Risk-adjusted net int income (IDRmn) 0.6 7.4 Fee-income (IDRmn) 0.1 1.1 Operating income (IDRmn) 0.7 8.5 Opex (IDRmn) 0.2 3.0 Earnings before tax (IDRmn) 0.4 5.5 Earnings after tax (IDRmn) 0.4 4.4 Disc earnings: PAT/(k-g) 11.8 146.7 Cust lifetime value (IDRmn) 11.8 146.7 Cust lifetime value (USD) 812 10,062 # of customers (mn) 11.0 1.0 Total market cap (IDRtn) 130.2 146.7 276.9 O/S shares (mn) 13,856 TP (IDR) 20,000 BVPS 2022F (IDR) 674 Implied 2022F PBV (x) 29.7


Exhibit 18: Sensitivity analysis on our base case TP based on loan yields

Individual

15 16 17 18 19

Merchants

13 16,100 16,900 17,700 18,600 19,400

14 17,200 18,000 18,900 19,700 20,600

15 18,400 19,200 20,000 20,900 21,700

16 19,500 20,300 21,200 22,000 22,900

17 20,700 21,500 22,300 23,200 24,000



Exhibit 19: Sensitivity analysis on our base case TP based on CoF and CoC

CoF

2.8 3.3 3.8 4.3 4.8

CoC

1.0 24,000 23,000 22,000 21,000 20,000

1.5 23,000 22,000 21,000 20,000 19,000

2.0 22,100 21,000 20,000 19,100 18,100

2.5 21,000 20,000 19,000 18,000 17,000

3.0 20,000 19,000 18,000 17,000 16,100


We also utilize the comparable peers on the global neo banks to obtain the better understanding

on the digital banks and ARTO valuation. ARTO’s EV/users of USD1,165 is reasonable in our view

given the abundant growth opportunities through GoTo partnership. Such figure is also still below

BBCA’s hefty EV/user of USD5,187 based on our calculation.

Exhibit 20: Peers comparison on digital banks and Indonesia big banks


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2.000

3.000

4.000

5.000

6.000

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Ban

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WeB

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AG

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BB

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CA

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USD


Exhibit 21. Income Statement

Year to 31 Dec (IDRbn) 2019A 2020A 2021F 2022F 2023F

Interest Income 53 90 434 1,170 1,849

Interest Expense (41) (25) (65) (180) (321)

Net Interest Income 12 65 369 990 1,528

Non-Interest Income (NII) 5 25 59 42 53

Oper. Income 17 90 428 1,032 1,582

Oper. Expenses (42) (237) (389) (505) (608)

Pre-provisions profit (26) (148) 39 528 973

Provisions & Allowances (66) (38) (53) (137) (219)

Operating Profits (92) (186) (14) 391 754

Non-Operating Income (27) (4) (5) (6) (5)

Exceptionals 0 0 0 0 0

Pre-tax Profit (119) (190) (19) 385 749

Income Tax (3) 0 0 (83) (150)

Minorities 0 0 0 0 0

Net Profit (122) (190) (19) 302 599

Exhibit 22. Balance Sheet


Gross Loans 285 908 4,488 9,071 13,198

Provisions (33) (82) (163) (327) (418)

Net Loans 252 826 4,324 8,744 12,780

Govt. Bonds 0 0 0 0 0

Securities 19 138 241 361 433

Other Earnings Assets 0 0 0 0 0

Total Earnings Assets 1,183 1,677 8,285 13,335 17,906

Fixed Assets 84 152 152 165 166

Non-Earnings Assets 39 309 165 225 186

Total Assets 1,321 2,180 11,819 14,668 19,360

Customer Deposits 599 804 3,421 5,905 9,952

Banks Deposits 28 2 0 0 0

Int. Bearing Liab. - Others 0 0 0 50 75

Total Liabilities 640 948 3,572 6,120 10,212

Share capital & Reserves 858 1,573 8,606 8,606 8,606

Retained Earnings (177) (341) (360) (58) 541

Shareholders' Funds 681 1,232 8,247 8,549 9,147

Minority interests 0 0 0 0 0

Total Equity & Liabilities 1,321 2,180 11,819 14,668 19,360

Exhibit 23. Key ratios


Yield on Earning Assets 6.3 6.3 8.7 10.8 11.8

Cost of funds 7.0 3.5 3.1 3.8 4.0

Interest Spread (0.8) 2.8 5.7 7.0 7.8

Net Interest Margin 1.4 4.5 5.8 6.9 7.7

Cost/Income Ratio 252.1 264.4 90.9 48.9 38.5

Oper. Exp./Oper. Gross Inc. 258.2 261.2 102.8 67.8 60.4

Gross NPL Ratio 2.0 0.0 0.6 1.3 1.2

LLP/Gross NPL 569.3 0.0 569.3 284.7 256.2

Cost of Credit 19.5 6.4 2.0 2.0 2.0

Loan to Deposit Ratio 47.5 112.9 131.2 153.6 132.6

Loan to Funding Ratio 47.5 112.9 131.2 153.6 132.6

CASA Mix 17.6 27.1 33.8 31.2 21.5

ROAE (30.6) (19.8) (0.4) 3.6 6.8

ROAA (12.3) (10.8) (0.3) 2.3 3.5

CAR 148.3 91.4 171.4 129.3 104.3

Exhibit 24. Dupont and growth

Year to 31 Dec 2019A 2020A 2021F 2022F 2023F

Dupont

Pre-Tax ROAA (12.0) (10.8) (0.3) 2.9 4.4

Tax Retention rate 102.7 100.0 100.0 78.5 80.0

Post-Tax ROAA (12.3) (10.8) (0.3) 2.3 3.5

Goodwil, Assoc& Min 0.0 0.0 0.0 0.0 0.0

Leverage 2.5 1.8 1.5 1.6 1.9

ROAE (30.6) (19.8) (0.4) 3.6 6.8

Growth (%)

Interest income (22.0) 71.2 381.7 169.6 58.1

Net Interest Income (58.2) 462.1 470.5 168.5 54.4

Other Oper. Expenses (3.8) 458.7 63.9 29.7 20.6

Fee Based Income (100.0) 0.0 0.0 112.4 52.5

Pre-Provision Oper. Profit 101.7 475.9 (126.4) 1,256.5 84.5

Net Profit 423.7 55.4 (89.9) (1,682.6) 98.4

Shareholders’ Equity 489.5 80.9 569.2 3.7 7.0

Loan (27.5) 218.8 394.3 102.1 45.5

Earnings Asset 139.9 41.8 394.0 60.9 34.3

Deposit 17.0 28.5 324.6 72.6 68.5

Int. Bearing Liab. 16.9 29.3 322.9 74.0 68.3

CASA 20.2 97.8 428.6 59.6 15.8

Total Asset 98.8 65.0 442.2 24.1 32.0 Source : ARTO, Danareksa Estimates

BUY Bank Jago

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