Bank Danamon struggles with credit costs due to subsidiary challenges

Credit costs rose to 2.8% in H1 2024.

Bank Danamon Indonesia faces high credit costs, asset quality risks, and earnings volatility partly stemming from problems faced by its vehicle finance subsidiary.

The Indonesian bank particularly faces liquidity constraints from its vehicle finance subsidiary Adira Dinamika Multi Finance Tbk, Moody’s Ratings said in a report.

“Despite an improvement in Bank Danamon's headline asset quality numbers, such as its Stage 3 loans ratio and loans-at-risk ratio, its underlying asset risks are reflected in the bank's elevated credit costs,” Moody’s said.

Bank Danamon’s credit costs increased to 2.8% in the first six months of 2024, versus 2.5% in the last half of 2023. Adira contributed to 86% of the bank’s consolidated provisioning costs in 2024 so far, driven by weaknesses in some of its lending segments.

Bank Danamon's profitability, as measured by return on assets (ROA), fell to 1.3% in H1 from 1.5% in H1 2023. ROA is forecast to hover around 1.4% to 1.5% in 2024.

Despite the challenges, there is potential upside to Bank Danamon’s post-pandemic credit profile, the ratings agency said.

Bank Danamon’s deposit franchise is modest. Its share of current and savings accounts at 46% of its deposits. Its level of liquidity is at 17.7% of its tangible assets.

Overall, though, its share of deposits is lower than the 67% average observed amongst its domestic peers.

We expect the bank's Stage 3 loans ratio to remain stable at the current level of around 4.0%, while credit costs will moderate but remain elevated at around 2.5% for full-year 2024.

“We expect Bank Danamon's liquidity to remain weaker than its domestic-rated peers, given its higher credit growth and the consolidation of Adira, which holds little on-balance sheet liquidity,” Moody’s said. 

Liquidity risks are mitigated by the bank's standalone liquidity coverage ratio, which was 141% as of 30 June, and Adira's well-matched asset-liability maturity profile.