Waiting for the End of the Digital Bank Euphoria
By: Prof. Dr. Budi Frensidy – Stock Investor and Investment Advisor and Professor of FEB UI
KONTAN – (11/10/2021) Almost all business activities and transactions have been transformed to the realm of digital, including bank operations. What used to be analog or manual, slowly but surely, is turning to digital. Anything that has not been digitized is considered conventional or old economy.
Some banks claim to have become digital banks or will go digital. Among them, there are those owned by large banks, subsidiaries of large conglomerates, affiliated with technology companies and those in partnership with fintech companies.
We are led to accept the classification of banks into conventional and digital, as well as the dichotomy of old economy and new economy. Problems begin to arise when the old is considered hopeless and the new is seen as having very bright prospects, so that the two can be judged in an extremely polarized manner.
Shares of old banks are only priced below 3 times the PBV, except for BBCA. While new ones with digital stamps are at least 4.5 times the PBV.
This is the perception created by influencers and “cheerleaders” in the market who constantly provoke retail investors, who are generally millennials and inexperienced. They then buy in without understanding the fundamentals of a stock, namely net income or earnings per share (EPS), dividends and future growth. The growth rate should ultimately be reflected by the increase in EPS as well.
When the market capitalization of a stock is small, institutional investors are usually not interested. However, they, especially asset management entities, were forced to go with the flow in the market when the issuer’s capitalization penetrated the top 20, entered the blue chip group and occupies a prestigious index.
Investment managers are worried that customers will question why they don’t own the shares. In order not to be abandoned by their customers, they also collect the trending stocks for their portfolios. This is what happened with a digital bank stock whose price rose by a thousand percent since the end of March 2020 and had become one of the five stocks with the largest market capitalization.
When the bank’s share price was Rp10,350 at the end of April, I guessed that there would be a correction because the PBV had already reached 17.5 times and the company was still losing money since 2015. What happened was that the price continued to rise until it reached the highest of Rp16,675 last month with a PBV of 28.5. times and a market capitalization of Rp231.1 trillion.
Amazingly, at this price that is already very unreasonable, there are still securities companies that publish their research reports with buy recommendations with a target price of IDR 21,000. If you were duped, you would have lost a lot because last weekend the price was only Rp. 12,925. As far as I know, this is the first time that a company that is consistently losing money has been able to continue to increase in price and even enter the five largest market capitalizations, only losing to BBCA, BBRI, TLKM, and BMRI.
Regarding small bank shares whose prices have shot up by hundreds to thousands of percent, ARTO is not alone. There were six other digital bank stocks that were among the top gainers this year, namely BBYB, BINA, BABP, BBSI, BBHI, and BANK, which gave returns of 380% to 2,599% each with an average return of 1.020%.
The PBV of the six banks also flew high to 4.5 to 44.9 times, or an average of 20.8 times. With a book value of 1/20.8 times the market price, it means that investors must be prepared to only receive 1/20.8 or 4.8% of what was paid, should the company be liquidated.
Before the digital bank euphoria emerged, market participants agreed that the reasonable PBV of banks and other financial industries was in the range of 1 to 3. This is because the financial industry assets consist of credit and financing, not in fixed assets such as land, buildings, machinery, and factories or intangible assets, such as patents and licenses.
The portion of fixed and intangible assets in a bank is generally no more than 5%. So, if banks and finance companies are liquidated, the cash received by shareholders will not be far from their book value.
Learning from other countries, investors should be aware that the euphoria of small bank shares is too much. Very few digital banks will come out winning.
Based on research by the Boston Consulting Group (BCG), out of 249 digital banks around the world, only 13 are profitable. In South Korea, of the three digital banks, only one is profitable, namely Kakao Bank. Meanwhile in China, out of 16 digital banks, only four are profitable. One of them is WeBank, which is a model for many digital banks.
Everywhere, a bank’s main source of profit comes from the spread or net interest margin, which is to disburse large amounts of credit at a low cost of funds (high CASA). Meanwhile fee-based income is only a small part and has never been a mainstay.
Companies and individuals who have a lot of money and dominate third party funds (TPF) in our banking sector, which reached Rp 7,100 trillion are still not willing to put down savings and demand deposits of hundreds of millions to billions of rupiah in the new banks. The total TPF in the small banks above is still around 5% of the total TPF.
In addition, large conventional banks that are still in physical contact with its customers still suffer cases of burglary of customer funds due to unscrupulous games. Imagine if there is no personal contact, because all are branchless.
Like a pandemic, the euphoria will pass sooner or later. As the number of positive Covid-19 patients continues to fall, to only 24,430 yesterday, the same trend will also occur in digital bank stock prices.
Source: Kontan Newspaper. Edition: Monday, October 11, 2021. Portfolio Rubric – Wake Up Call. Page 4.
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