BTPS: Serving the Underbanked to Make Bank
Updated: Oct 24, 2021
BTPN Syariah Tbk (BTPS) - Direct Play in Indonesia's Financial Inclusion Story
BTPS is currently valued at a price that assumes that the pandemic’s impact will extend indefinitely, causing depressed earnings growth and margins to persist
The women ultra micro financing segment is difficult to enter for most player, and BTPS is one of the only few players that can operate within it profitably
Following the Covid pandemic, ultra micro financing will continue to increase as business activities increase, including for those at the bottom of the economic pyramid
Indonesia: a land of difficulties and opportunities
Despite valiant efforts to increase financial inclusion, Indonesia remains the number 9 most unbanked country in the world according to Global Finance Magazine in 2021. While financial inclusion is not the only determinant for a country’s development and prosperity, a clear high correlation can be established as we see less developed countries like Indonesia, Colombia, Argentina, and Kenya consistently having less financial inclusion than countries like Norway, Sweden, and the Netherlands, which are some of the most developed and financially included in the world.
Being aware of this, the Indonesian government has continually made conscious efforts to increase financial institutions’ reach, particularly towards the most underbanked segment, which comprises MSMEs (Micro, Small, and Medium Enterprises). MSMEs contribute to over 60% of Indonesia’s GDP and over 90% of its labor force’s employment. However, in 2018, only 20% of the credit disbursed by financial institutions went to MSMEs, while the remaining 80% went to larger corporations.
An even more underserved demographic among this group is the ultra-micro segment, comprising demographics that require lending of less than IDR 10 mn. As it stands, there are over 40 million individuals in Indonesia that fit this criteria. Furthermore, the women in this group are even more disadvantaged as according to BAPPENAS, Indonesian women are disproportionately disadvantaged in terms of financial access compared to men, forcing them to mostly resort to borrowing from fragmented KUR, koperasi, informal lending, or worst of all, illegal loan sharks.
The poor woman’s bank
New problems beget new solutions, and thus are what PT BTPN Syariah Tbk (BTPS) is offering. Being a Sharia-compliant subsidiary of a prominent BUKU III private Indonesian bank, BTPS is one of only a few players operating within this very niche segment of the country’s unbanked population.
BTPS, along with PT Permodalan Nasional Madani (Persero) or PNM, comprise the only two ultra micro segment players that have nationwide operations. Their unique operating models allow them to generate higher and more stable income than BPRs, KURs, koperasi, and loan sharks.
BTPS lends only to female debtors, while PNM has a product dedicated exclusively for women amongst its loan book. They have agents who gather debtors in groups of four for biweekly payment installments and business training, allowing for debtors to hone their business and planning capacity while also minimizing default risk, as debtors cover for each others’ payment delinquency within the group.
Source: company, own observation
With this product offering, a low rate of non-performing loans, and only paying modest interest on their deposits, BTPS has been able to enjoy a stellar return on equity in recent years, much higher than those of other top banks in the country.
While PNM is equally attractive to BTPS in and of itself, it is only a small subset of the gigantic BRI network, and thus only contributes to a small part of BRI’s income. Its income in 2019 was only IDR 4,924 bn compared to BRI’s IDR 122,767 bn. We believe that BTPS is the much more ideal vehicle for a pure play investment in the ultra micro segment.
Valuation grounded in short term problems
The recent Covid pandemic has brought upon unprecedented difficulties across all aspects of Indonesia’s economy. The banking sector has also not been left unscathed. From 2019 to 2020, commercial banks’ lending declined from IDR 5,684 tn to IDR 5,548 tn, while current earnings declined from IDR 156 tn to IDR 105 tn during the same period. However, it is also common knowledge that we are at the dawn of a gradual economic recovery. Businesses are adapting, vaccines are rolling out, and buying power is slowly but steadily returning, leading to GDP growth of over 7.0% y.o.y in Q2 of 2021.
Despite all of this, BTPS has been trading at a contracted price-to-book ratio for a while, implying a permanently impaired earning-generating potential in the future.
This does not fit with BTPS' performance’s recent developments, where earnings are starting to stream in more steadily and less debtors are failing to pay their dues. We have no reason to believe that either the ultra micro lending landscape or BTPS’ business has structurally changed over the past year to warrant an assumption that BTPS will only enjoy meager growth following the Covid pandemic, and never reach the pace of growth the likes of which it enjoyed in 2017-2019. A more likely scenario is for BTPS to recover to reach 5 mn debtors in 2022, matching its all-time high from 2019, and enjoy a growth rate just slightly slower than its 2017-2020 CAGR of c~15%.
Source: own calculations
The Indonesian economy has proven its resilience through multiple hardships throughout history. Like any recessions, the hard times end and recoveries follow. When the recovery kicks in full swing, the ultra micro businesses will need to play their parts within the economic machine. Farmers will need to supply their crops, fishermen will need to offer their catch, mom and pop shops will need to serve their customers, and in order to do all this, they will need their trusted financial institution to continue to provide capital and guidance.