OCBC NISP: One of the Most Underrated Bank in Indonesia

Today, let’s talk about PT. Bank OCBC NISP Tbk. Since early 2023 up to when I wrote this article (July 23rd, 2024), its share price has increased around 78% (excluding dividend ~20%). What are the factors that make NISP share price rise significantly? Stay tuned!

Bank Function

Before we dig deeper about NISP, let’s go back a bit to the fundamentals. What are the functions of a bank? From an operational point of view, a bank is a party that collects the people’s money and then lends it to the other parties such as individuals, corporations, housing needs (KPR), etc. The money that the bank collected from its clients can generally be divided into three types:

• Savings account
• Current/checking account
• Deposit account

The composition of those accounts has an effect on the bank’s costs. For instance, if a bank mostly consisted of savings & current accounts, then its cost must be lower than a bank that consisted mostly of deposit accounts. Hence, if the bank’s CASA (current account saving account) portion is bigger (like BCA), then in %, the interest that the bank pays to its customers will be lower than other banks that have a lower CASA portion.?

Moreover, if you try to compare the cost of funds between BCA & BRI, in terms of %, BCA’s cost of funds will be cheaper than BRI’s. Why? Because the CASA portion of BCA is 80%, while BRI CASA portion is around 65%. How about NISP? Please take a look at the figure below:

Prior to 2020, NISP’s CASA was relatively small, ranging around 34-41%. After 2020, NISP CASA has consistently risen to 50.65% in 2021 and 54.60% in 2022. Why is CASA so important? Again, firstly, from a cost point of view, it is cheaper for the bank (current & saving account interest rate is definitely lower than deposit rate). Secondly, the bank requires the third parties/customers funds to be able to distribute credits to other parties as well. As a result, if the CASA ratio is high and the bank is consistently growing, then the bank will be able to distribute bigger credits. If the CASA is growing, then the loans will also automatically grow.?

However, it is not an easy matter to collect CASA from the customers. In this NISP case, we know that the CASA ratio is growing. Not only from % perspective, but also from nominal perspective. From 2016 to 2019, NISP’s CASA only increased from IDR 40 trillion to IDR 50 trillion. Nevertheless, from 2019 to 2022, NISP’s CASA increased from IDR 50 trillion to IDR 96 trillion (almost double in three years!). This is definitely a good sign for NISP.?

After I dig deeper why NISP CASA could increase significantly, turns out I found these things:

• The NYALA program by OCBC NISP

Wherever I go, I often see the NYALA stands, the NYALA booths, the NYALA advertisements, financial fitness by NYALA, etc. All of these initiatives are a program by NISP to collect the customers’ funds in the form of CASA. I think the NYALA initiative is a successful one. Remember, in the last 3 years (2019-2022), NISP’s CASA has almost doubled, and it is really impressive. Next time, if you see any program from any bank to increase its CASA, and once you validate it the CASA is actually rising, that is definitely a good sign.

• Prudent Credit Distribution

After increasing the CASA, the credit distribution must also grow in order to increase the net profit. Why? Remember, the bank will always charge you with the credit interest. As a result, in order to increase the net profit, the loan distributed by the bank must also rise. The loan is able to grow because the third party funds (CASA & Deposit) are also growing. In this NISP case, the loan growth is quite impressive. From 2016-2020, the loan increased from IDR 100 trillion to IDR 114 trillion (grew by 14% in 5 years). However, from 2020-2022, the loan grew by 17.5% in just 2 years; from IDR 114 trillion to IDR 134 trillion. Thus, what NISP achieved in 5 years, they could have achieved in just 2-3 years recently. Once again, why could their performance improve? Because the CASA has also grown.?

Furthermore, I also checked their non-performing loan (NPL). Let me remind you about NPL. In banking industry, there are five Loan at Risk (LAR) categories:

• Smooth = Never late in paying the loan back (including the interest)
• Needs attention = Late for 30-90 days since due date
• Not smooth = Late for 90-120 days since due date
• In doubt = Late for 120-180 days since due date
• Bad credit = Late for >120-180 days since due date

The NPL are the loans that fall under “Not Smooth” - “Bad Credit” categories. When I checked the history, NISP’s NPL expense (yellow line) has always been under 2% except when COVID happened?where the NPL reached a bit above 2%. Please see the graph below:

If you learn it further, it seems like a waste that the NPL is low where on the other hand the write-off is high. Well, it is possible but if you look further into the cost of credit (cost of credit = Write-off expense divided by total credit), which means how many % of the credit that the bank has written-off, mostly NISP always maintains it under 1.5% (only once during COVID it reached 2.1%). From this point of view, after all these times, NISP loan distribution is quite spot on/prudent. Of course if we compare to BCA where they always maintain it around 1%, even sometimes under 1%, NISP is doing a pretty good job here. Looking at its competitors, there are many banks who can’t maintain the cost of credit under 2%.?

NISP History

I also try to learn about NISP’s history. Once upon a time, Indonesia ex-BUMN Minister Mr. Dahlan Iskan wrote a book about Mr. Karmaka Surjaudaja’s biography. The book title is “Tidak Ada yang Tidak Bisa”. Mr. Karmaka is the son in law of NISP founder. Due to some circumstances in the past, Mr. Karmaka was “forced” to continue his father in law business (you can read the book if you want to know the details).?

In its history, since the beginning of its establishment, NISP has always been extra thorough in distributing loans. It is like a culture in NISP that makes them survive up to this day. NISP is the 4th oldest bank in Indonesia. They have been through some crisis throughout the time such as:

• "Sanering" crisis in 1960s
• 1998 crisis where so many banks collapsed (including BCA, thanks to the government though for bailed them out) yet NISP could survived

Its history shows us that they already mature as a business. Their performance has also improved lately. Furthermore, in terms of valuation, NISP’s valuation is also relatively cheap. If you try to compare between NISP share price & its net earnings in the last let’s say 15 years, their performance has consistently improved (except in COVID). If i am not mistaken, in 2022, their price to earnings ratio was only 5-6x. Its price to book was 0.5x. So this bank could still grow whereas in the past their CASA ratio was only about 30-40%. What about now when their CASA already reaches >50%? If they can keep increasing the CASA ratio which I’m quite sure they can, then the growth potency is still there. It’s kind of funny though that a bank who can consistently grow has a “sick” bank valuation. It was quite a rare chance back then when an opportunity to invest in a company like this arose.

After you read this article, you might want to expect to find such a company with a cheap valuation just like NISP. Well, you might not immediately find it. Probably you need a few more years to find such an opportunity to emerge again. Nevertheless, you can use this study case as a reference that whenever a rare opportunity arises, do not hesitate to splash your cash & back up the truck.?

A little bit of fun fact, the Indonesian legendary investor Mr. Lo Kheng Hong has "stealthily" accumulated NISP’s stock since a few years ago. Finally, let’s recap some of the key points from this study case:

• Always learn the key metrics (CASA, loan growth, impairment losses, write-off, etc.)
• Check the key metrics whether there is any sign of it improving
• Study the history, see the company’s culture
• Calculate the valuation, whether it is still cheap or at least at fair value

“Someone is sitting in the shade today because someone planted a tree long time ago” - Warren Buffett

Happy Investing!