In this RadioFinance session, Yasushi Itagaki, president director of Bank Danamon discussed how Indonesia responded to the COVID-19 pandemic, and how the bank intends to grow by building on local branding and management expertise, serving domestic SMEs, corporates and consumers, as well as the prospects of future acquisitions to improve returns.
Yasushi Itagaki, president director of Bank Danamon, described the bank's collaboration with Mitsubushi UFJ Financial Group (MUFG) in its business growth and to solidify its market niche. MUFG, one of the world’s leading financial groups with headquarters in Tokyo has been expanding its network in Southeast Asia, and it's on the lookout for further acquisitions in Indonesia.
Itagaki was appointed president director on 1 October 2019, a few months before the COVID-19 outbreak. The bank achieved a 65% profit growth in the first quarter of the year. Operating profit increased by 49%, and non-performing loan (NPL) rate improved to 2.8% in the first three months of 2022. He expects that the vibrant Indonesian economy will drive the growth of its corporate banking business.
The following key points were discussed:
The edited transcript of the interview:
Foo Boon Ping (BP): Welcome, everyone to another RadioFinance interview. This time, we are having a conversation with the president director or CEO of Bank Danamon, one of the leading banks in Indonesia. We are speaking with Yasushi Itagaki or very endearingly called “Pak Yaz” by his colleagues and peers in Indonesia.
Welcome Pak Yaz to RadioFinance. Thank you for speaking with us and we have interacted with Pak Yaz about how Bank Danamon was dealing with COVID -19 pandemic last year. As the global economy is emerging from COVID into a post-COVID world, we want to find out from banks in different regions and countries how they are dealing with the opportunities and challenges that have opened up?
COVID has created some toll on economies or livelihood, but Yaz catalysed a lot of changes that otherwise wouldn't have happened. One big change, for example, is in "how it has accelerated the digitalisation of livelihood or lives, and make economies more digital?".
In Indonesia, there are a lot of fintechs and unicorns that have come up - the likes of Gojek and Tokopedia that is a very exciting environment to be operating in. What lessons do you think Indonesia, the financial industry and Bank Danamon, the institutions that you run in particular can draw from the crisis?
Indonesia’s generosity and solidarity exemplify Bank Danamon’s strategy
Yasushi Itagaki (YI): Your first question is "what are the lessons we learned as a country or as Danamon?"
Let me start with a very interesting data point about the World Giving Index. I recently found out this index. It is an index to measure how generous each country is. It’s measuring the generosity of each country. Out of 120 countries the index analyses, surprisingly, Indonesia is the highest in the world.
This index is based on interviews with individuals in these countries. For example, "in the past month, did you ever support strangers or someone you don't know?" "Did you ever donate in the last months?" "Did you do volunteer works?" Based on that individual survey or interviews, this index was created. This means Indonesia, not only is the highest, but also increased this generosity index through this pandemic, while developed countries lost their ranking or index.
My reading of this index is that Indonesia demonstrated its solidarity as a country or as a nation amid the pandemic. This is the biggest learning or lesson that this country has experienced, despite the very heavy toll on human lives.
Among the ASEAN countries, Indonesia is one of the toughest in dealing with COVID, but at the same time, people showed solidarity. Applying this solidarity or unity feature of Indonesia, we, as Danamon made a similar approach. At the very beginning of this pandemic, we established internally a so-called “crisis command centre (CCC)”. This is an organisation that deals with whatever issues on COVID. It works 24 hours, seven days a week. It deals with all these issues and meet with me or the board of directors every day, in the initial stage of the pandemic.
As a result, we introduced lots of measures, such as, I think, we are one of the first organisations or earliest organisations who provide vaccination to all our staff. We created our own isolation centre for those who are suffering. We provided the digital-based daily health check. As a result, we experienced a very high score in engagement. We do periodical engagement surveys, but our employees showed very high engagement scores throughout the pandemic. We did not only satisfy or increase the engagement or happiness of our employees, we extended this practice to our customers and communities. We provided more than 30,000 vaccine doses to our neighbours, community and drivers to show our commitment. We want to survive with our customers and communities. All in all, we gain confidence as an organisation throughout the pandemic.
BP: Looking at Indonesia, the people, how generous they are to one another, you can see that everywhere you go. In Jakarta, there are always people out there in the streets that are helping direct traffic, helping everyone along.
You joined Bank Danamon in 2018, after the acquisition by Mitsubushi UFJ Financial Group (MUFG). You've always been very involved in mergers and acquisitions (M&A) in the US, in different markets, helping your clients do that. Finally, you're doing it for the bank, acquiring as part of a network of banks that MUFG has acquired, like Krungsri in Thailand, Security Bank in the Philippines and VietinBank in Vietnam to form a regional network.
You assume the position of a president director or CEO in October 2019, just before COVID. Now, you must have great plans and strategies as president director and running the bank. What kind of impact did COVID have? After three years, we’re almost probably at the end of COVID, how will you continue that journey?
MUFG continues with its M&A in Southeast Asia to compete with global banks
YI: At the time of designing MUFG’s ASEAN strategy or the execution of M&A, we didn't anticipate COVID. It’s beyond our imagination. Not only here in Indonesia, we call them partner banks, Krungsri in Thailand, or VietinBank in Vietnam, and Security Bank in the Philippines, they’re all well-surviving banks throughout this pandemic, taking a similar approach because first of all, this is from MUFG’s perspective. Their strategy in partnering with these local banks is long-term oriented goals.
MUFG is competing with global banks such as HSBC, StanChart and Citibank. They have a very strong footprint in Southeast Asia or Asia, and they were even older than MUFG. However, their approach is a sort of “up and down, hit and run.” Sometimes, they are very fast in pivoting while MUFG’s approach is very consistent. Sometimes, slow, but very consistent, and it’s long-term.
The reason behind this M&A is dealing with global customers such as Japanese, Americans and Europeans. Their request is more on domestic market rather than cross-border market. To better serve the global multinational clients, MUFG needs a local footprint, whereby we provide domestic loan, cash management, deposits and networking. By default, MUFG won't acquire a bank, as it is, not just rebranding to MUFG, but they prefer to acquire a local bank run by its management and maintain or strengthen its brand appeal. That's the value that is appreciated by global customers.
We keep on educating or aligning local Danamon team with head office in Tokyo. This direction stays as it is, despite this pandemic. And so far, three years after this consolidation and acquisition, I see more people on the ground in Bank Danamon, knowing the reality by actions and execution, not just words, but by the accumulation of actions and implementation, they have more belief in MUFG’s long-term approach.
BP: From what you have expressed, your key focus can be encapsulated in three key areas in your strategy. One is, you’ve mentioned leveraging of MUFG collaboration. What businesses it has in Indonesia, including Adira Finance.
Second is on your digital; building out your digital capabilities, and working with fintechs like Investree. The third leg will be on workforce; your human capital in developing a human resource (HR) workforce. Preparing for the future that's in line with your strategic kind of focus, which is more for the longer-term, building the business.
Danamon’s first quarter financial result showed its strength as a BUKU IV bank
In 2020, the bank has also become a BUKU IV (Commercial Bank Business Activity IV) bank. Being able to access more customers, and from a regulatory perspective as well, it required more responsibility in capital adequacy. We look at those areas and you continue to grow the bank very strongly, and healthily. From the latest quarter, we saw the key highlights. You’ve grown profit by 65%.
YI: Yes, 65%.
BP: Operating profit grew 49%.
BP: Loan growth continues to be strong. Asset quality, well-maintain and increased coverage, non-performing loan (NPL) rate is still around 2.8%. current account savings account (CASA) ratio is very strong like 60%, or grow by 50%. You're building on a trajectory to grow the business.
Synergy with MUFG enabled Danamon to capture the car manufacturing market
YI: Exactly. You have well-summarised what we're doing in three areas. First, the biggest pillar is synergy or collaboration with MUFG. It’s very simple, but not easy to implement. But now, we are getting a better shape on this. One example is we took a renewed focus or highlight on the automotive sector because MUFG is a lead bank. It’s the main bank to all Japanese car manufacturers like Toyota, Honda and Mitsubishi.
We have Adira Finance, which is the leading independent financier for car purchases of individuals. Danamon is very strong at the dealers. We are providing working capital inventory finance for more than 150 dealers. But in the past, we operate independently among these three manufacturers. We are able to combine the efforts and consolidate our business from end-to-end, from the car manufacturer to gears and the consumers.
But to reinforce our combined operation, last month, we became one of the first financial sponsors for the Indonesian International Motor Show (IMS), which is one of the biggest automotive motor shows. We presented and gave a message that we liked it. We aspired to be one of the most trusted financial partners in the automotive system, and that message was very well-received or well-resonated. People started to look at us as if these three companies are all aligned. I was part of the financial resources and solutions provided to manufacturers, dealers and individuals. This is a sort of empowered demonstration of MUFG collaboration.
Building a digital ecosystem
Every CEO talks about digitalisation. We, I am, too. This is on two fronts; One, is enhancing our digital capability. Every bank has its app but, we are neck and neck and we have to keep enhancing our digital app capability. The real key success factor in this digital game is how to create our digital, unique ecosystem because we invest a lot in digital capability. From a consumer point of view, it's not a big difference. What is more important is to know, "why do I use Danamon’s apps instead of our competitors’ apps?"
BP: D-Bank PRO.
YI: Thank you for recognising it. How to make D-Bank PRO sexier? That’s key. What is the reason, or purpose of the customer to use and choose D-Bank PRO? To do so, we have to create our own unique digital ecosystem. Our parent company, MUFG invested in Grab and by that investment, Danamon is given preferential status. Grab wants to do some digital services with a financial company. We are the first called bank so we jointly plan, design and establish digital joint products.
One example is we recently issued a co-brand credit card with Grab, which gets a good interest from the customers. Danamon plans to provide digital lending or CASA to their drivers, merchants and consumers. All the companies or individuals in the ecosystem, we don't link to Grab, it’s potentially Danamon’s reach. Digital partnership is very important. How to create a Danamon ecosystem? That’s where we are working hard.
BP: I want to get your comments on one trend that seems to be happening in Indonesia. Elsewhere in the region, regulators are issuing digital banking licences for digital-only banks to operate. In Indonesia, it’s not quite happening yet. The bigger banks are buying smaller banks and also the bigger bank may own smaller banks. You have two tiers of banking licence and it seems that the bigger ones, so give some examples like Bank Mega buying Bank Allo. GoTo Financial, Gojek and Tokopedia buying Bank Jago.
BP: The values of these banks have gone up overnight. They're using them for their digital banking proposition. Just to name a few, BCA has got Blu. BRI has got Bank Raya, BRI Agro, which they rebranded. This development and strategy, is it for every bank? Do you foresee more banks buying smaller banks and turning them into digital-only banks or their digital-only bank subsidiaries?
Digital banks are experimenting and still not profitable
YI: Yes, you rightly described it is happening. Almost every day, we have some news coming up. Yes, Danamon is also looking around that opportunity. My view is none of those digital banks is profitable or successful, yet. It's really at the very initial stage. They are testing, learning and experimenting - this so-called ‘digital bank’, that's one thing that we have to understand.
When I talk with those executives, or consultants, the key in this digital bank is again, scale. How to acquire customers, and so far, they are relatively successful in deposit gathering, their own or embedded ecosystem, but they're struggling to find lending opportunities.
In Indonesia, whatever way we create digital banks or embedded digital services, in the end, how to provide or find good credit opportunities, and how to manage that credit quality under this developing stage of economies is the challenge. Bank Jago is gaining lots of features and attention and its stock price is getting high, but it's becoming saturated to stabilise because investors are questioning. "How do they grow their loan book?". So far, most of their loans are peer-to-peer (P2P) channelling. It's not identified by Jago, but they just rely on other fintech companies’ identified lending opportunities, so lending side is the key.
BP: There was a time, this whole P2P phenomenon started in the US, but it already become big in China. In China, it eventually proved to be more of a shell. When regulator stepped in, that whole industry was gone, and some P2P lending in China, now call themselves loan facilitation providers. But this appears to be thriving in Indonesia. P2P lending has tighter regulation and better focused on risk management.
You, yourself work with Investree, a marketplace. Identify for us where the opportunity for loan growth is. You targeted enterprise banking and a commercial approach. With a nexus to Japan or Japanese corporates or Japanese anchors, and also SMEs, it’s part of the whole ecosystem.
BP: Obviously, consumer as well.
BP: Are you looking at financial inclusion, the underserved or those kinds? Oh, you're looking at BRI.
Combined strength of MUFG and Danamon provides corporate and consumer banking
YI: Yes. Where do I see the opportunity for business and long-term growth? Our primary focus is corporate banking because we have lots of reasons or strength behind this. We’re accelerating the growth because of MUFG. As you’ve pointed out, we have good access to Japanese multinational corporations (MNCs). But their operation is not just manufacturer level. They have suppliers and distributors. We are able to capture the whole value chain and supply chain of the big conglomerates. We are growing rapidly in this value chain approach.
Second, is consumer. Consumer banking means our mortgage or credit card business. In the past, Danamon’s consumer banking wasn't prioritised. But to make Danamon a bank that can grow sustainably, I truly believe that consumer franchise is the key for both lending and funding. To sustain the long-term growth, we have a very good quality consumer funding franchise. We kept investing in the branch network, or digital channel and in people or human capital to let our consumer franchise become modernised and competitive.
In mortgage business, we’ve changed or shifted from the old model to the new model. The new model is that, we put more focus on collaborating with big developer. Luckily, the Japanese developers are quite active in creating property business. They are active in producing residentials. We provide the investment finance for the developer, and leverage that commitment into the mortgage. We become a preferred mortgage bank for a big, platinum, residential area. In this way, synergising with MUFG enables us to grow the mortgage business. This is an independent play, but we keep investing in branch network, people and digital to strengthen the consumer franchise.
BP: Your operating expenses have gone up because you're investing in digital capability and technology. Tell us about preparing the bank for the future, as you create an ecosystem and leverage off the synergy. The future technology infrastructure necessarily needs to be cloud-based. It needs to be not just cloud-based but cloud-native, and be focused on microservices, so they leverage application programming interfaces (APIs) to deliver open banking, open finance and embedded finance. Now, you have acquired Danamon with legacy systems. What imperative is to move that to the cloud for now and also, look at some of the opportunities that that affords.
YI: Yes, for future growth, we have to modernise our IT infrastructure and make this more effective. In moving to a modern IT infrastructure, we hired lots of IT architecture designer team. Last year, our IT organisation expanded to less than 300, or to 270 staff. We increased our people by 100 last year.
BP: Hired more people.
YI: Yes. We simply hired 100 IT staff last year, even in this pandemic time to uplift our IT and human capital capabilities. They all started to review and redesign our architecture to make us more modern. Cloud computing is one thing. We are quite active in API for us to connect to all digital players, fintechs or e-commerce. We are also discussing open banking-as-a-service (BaaS). If we grow our customer base and transaction volume, this architecture will be more modernised so we need to use microservice. We just started on this new journey. It's going to be at least five years of journey.
BP: Who are guiding you in that journey? There are new business operating models. In the past, the bank is all about manufacturing and distributing the product. A lot of banks are recognising that they have a network, the distribution, but they need not manufacture all the products. There are fintechs out there. They do them very well, provide them through banking as a platform. You can provide that to other banks as BaaS. That will guide your future operating model and business model, as well.
What is guiding it, will it be mainly the technology or business people? You and your board, how do you tackle this future-proofing the organisation? One particular direction, you go may set you up for the next 5, 10 years.
YI: Yes, absolutely. It looks like a technology play, but technology resources cannot guide us to this new model of banking. We need to have a very good business people, transaction banking, digital team, as well. We have the committee. We discuss this future strategy based on the composition of the committee. We have technology, digital, transaction banking and business banking people. It's a combination of all those pieces, otherwise, we’re not able to create a sensible model. Still, we are at the dome, we don’t have a convincing idea, yet.
BP: Okay. You haven’t made a big commitment in, for example, going on the cloud? Having some of the production capability in the cloud that will come later in the next three, or five years?
YI: Yes, in two to three years, we will lay out the design. After which, we keep on investing, so, that's where we are
Strategy to increase Bank Danamon’s return on equity and profitability
BP: We’ll talk about Indonesia as a market. It's quite intense services-wise. If you look at the population of over 220 million, although the bankable population is smaller. Good margin in the 7%, 8% range, asset quality seems to be well-managed. If you look at a lot of the profitability itself, banks are under profitable. If you look at your return on equity (ROE) they're under 10%, 7%, 8%. Where do you see the challenge in increasing banking services efficiency, in profitability going forward, and how are you prioritising that? I'm sure the investors and analysts are looking at that as well.
YI: The reason why our ROE is not as the industry’s top-tier level is simply because one, we have a relatively large capital, which is good on value-added tax (VAT). From a return perspective, maybe we should reduce our equity or capital.
BP: You’ve got cover for BUKU IV.
YI: Yes, that's one reason, so we should maintain that, but, just purely from the institutional investor’s perspective, with reduced capital, we are able to provide a better ROE. But there are two reasons. We believe that Indonesia is a growing country. Second, we see Indonesia as a relatively higher risk. We have lots of uncertainties, so we better have a bigger cushion of our capital for two reasons; we maintain this current equity so it could be used for a downtown time, or future acquisition.
In business performance or productivity, we have a very solid record in corporate banking, but a relatively smaller return. Even risk-adjusted, still, the return is not big, but we have a very strong base of Adira Finance. It is a successful and established model. Once COVID is over, we see more motorisation. Here in Indonesia, they give us a much better return.
The challenge is our small and medium-sized enterprise (SME). We have a kind of legacy issue on SME. Starting last year, we re-modelled this SME with better segmentation and a different operating model. Now, the pandemic hit SME Adira most because they are dealing with a relatively weaker segment. This pandemic issue continues for at least one year. But, for the new business, the quality of newly acquired business in SMEs is showing a good record. Maybe, starting next year, we see a more positive outcome and return from SMEs.
BP: Return from SME and that is a very interesting area that you talked about earlier too. There's an opportunity for future further acquisition.
YI: Right, that's always. We are looking around the market because MUFG recently announced it will divest its portfolio in the US. They are in the process of setting up Union Bank, which is a California-based commercial bank. By retrenching, they put more focus on Asia, here in East Asia and in digital. Indonesia is the primary market representing Asia. We keep an eye on any other additional acquisitions.
BP: The third area you want to discuss is, ‘what challenges remain?’ There's still some residue effect of COVID. As you’ve mentioned, SMEs will maybe take a year to sort out. How do you see that worry about the rising interest rate, which is good for margins? But inflation, how does that impact growth? Inflation and interest rate kind of add growth as well
YI: Yes, absolutely. As a side effect of this COVID, we see a lot of disruption in the global supply chain. Too much rigid, zero-COVID policy in China, even accelerates this disruption of the production and supply chain out of China. We see a lot of that impact.
In automotive finance, we see high demand from consumers for cars, but the dealers are unable to deliver the cars. The cars are waiting for three months, six months. That's an issue related to this inflation and COVID. But in the long run, inflation is an immediate risk or challenge, it’s not visible yet. In the long run, climate change is an emerging new challenge for us.
Indonesia is a big economy and has big population, but highly dependent on coal, as an energy mix. Unfortunately, this global environmental, social and governance (ESG) movement is affecting negatively, putting more challenges to Indonesia.
The government is committed to the long-term carbon zero emission policy. How to make this in the next 5 to 10 years successful, as it transitions into this more sustainable environmental economy, that's quite a challenge. Not only do we commit to carbon zero through our operation, but we want to commit to support our customers with transition financing.
One of the ideas in this challenge is luckily, we are well-connected with Japan's MUFG. Japan as a country has lots of high technology or solutions to help the power producers or manufacturers who produce lots of carbon to reduce their carbon emissions. Japan made high technology for the companies here, and we provide financing because it could be deemed as a green project. That's a long-run and important area for us.
BP: Area of challenge, as well as opportunity.
YI: It's an opportunity.
BP: In terms of cleaner energy production and also cleaner manufacturing.
YI: Yes, exactly. Cleaner manufacturing.
BP: The kind of high-tech production that is low emission.
BP: In Indonesia, there are great forestry and agricultural practices, as well as water and carbon emissions.
YI: Growingly, the big banks like us must be more socially responsible. How we add value to such social issues is the key for us to stand with good respect from our stakeholders. Climate change is definitely a challenge, and financial inclusion is another. Digitalisation of the economy is also a thing.
BP: It’s also bringing technology to digitalise the economy, especially in the telecommunication area, infrastructure, telecommunication infrastructure and fibre.
YI: Yes, I agree.
BP: Great. We're very glad to have this update of our conversation. We wish you and Bank Danamon well. In your next results briefing, do invite us, and we'll be keen to cover your progress and continue the conversation as well.
YI: Thank you.
BP: Thank you so much, Yaz for spending time with us and for giving us a deeper insight into the thinking behind Bank Danamon’s operations in Indonesia as well as MUFG's imperative for long-term growth in the market.
YI: Sure, we are very honoured that we draw interest from you, highly esteemed media. Let's continue on this sort of update.
BP: Great. Thank you so much.