In our opinion, the last three SRBI (Sekuritas Rupiah Bank Indonesia) issuances this year, each with a gross issuance of IDR15tn, is not low enough to improve banking sector liquidity. With projected SRBI maturities in 1Q25F of IDR178tn, the assumed weekly SRBI issuance of IDR15tn (reflecting average weekly issuance so far this year) would imply net issuance of IDR16tn in 1Q25F.

Thus, despite the recent reduction in blended SRBI yield to 6.955% (as of 17 Jan 2025), from peak levels of 7.485% (05 Jul 2024) and 7.253% (27 Dec 2024), we think it would not materially translate into lower funding costs in the banking sector.

In our opinion, broadly, liquidity in the banking system remains tight, particularly if we take into account liquidity concentrations at major banks. As shown in the chart below (See Fig. 8), as of 3Q24, system LDR stood at ~88%, but banks within KBMI 3 (Bank group based on core capital; mid-sized banks) had their average LDR at ~91%.

Alternatively, we think BI should simply cut reserve requirements (RR) in the banking sector, specifically for IDR deposits from 9.0% to 3.0-5.0%. This should have an immediate impact on improving liquidity, ultimately lowering funding costs and potentially reducing lending rates. This could help improve economic growth. We estimate every 1% reduction in RR would increase liquidity in the banking system by ~IDR90tr

Still, regardless of BI’s future policies, we see a fundamental improvement in major Indonesian banks’ earnings profiles in 2025F vs 2024. Specifically, we argue that with guidance from these major banks pointing to slower loan growth in 2025 vs 2024, the tight banking system liquidity should NOT worsen. We think we could see stable NIMs for these banks in 2025F. Thus, unlike in 2024F, when banks may have had to compensate lower NIMs with higher loan growth to maintain their earnings momentum, this year’s earnings growth may be like 2024F’s, albeit with reduced loan growth. This suggests potentially lower balance sheet risks for these banks in 2025F vs 2024F.

In our recent note, we analysed trends in monthly loan write-off rates for major banks, which we consider a leading indicator of their future asset quality. High write-off rates could lead to elevated credit costs, and vice versa. Based on our assessment for bank-only YTD Nov-24 results, we have seen some mixed write-off (WO) trends for these major banks. Generally, BBCA/BMRI/BRIs have demonstrated improvements in their respective WO trends. Meanwhile, BBRI’s write-off rates have appeared to be stable (albeit still elevated at ~3.3%), suggesting that future credit costs could be more stable, thereby potentially improving earnings predictability for the bank.

Based on the above, we maintain our long-term positive stance on the Indonesian banking sector, with a preference for major banks, with BBCA IJ as our top pick in the sector (Please include the names of preferred banks and their ratings).

Valuations and risks

BBCA — We derive our TP of IDR13,200 using DuPont analysis with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 0.8x and a CAR-adjusted ROAE of 24.5%. Our TP implies 5.4x FY25F P/B (vs current price valuation of 4.2x) and 26.9x FY25F P/E (vs current price valuation of 21.0x). Risks are worsening economic trends, tighter liquidity competition, and/or higher credit cost and opex growth.

BMRI — We derive our TP of IDR8,700 using DuPont methodology. Key parameters are a risk-free rate of 6.5%, an equity risk premium of 7.8%, and a CAR-adjusted ROAE of 20% and beta of 1.03x. We have also used 2025F book as reference. Our TP implies a 2.5x FY25F P/B and a 12.6x FY25F P/E (compared to current price valuations of a 2.1x and a 10.6x, respectively). Key downside risks are worse-than-expected macroeconomic trends, government intervention, tight liquidity competition, and higher credit cost and opex growth.

BBRI — We derive our TP of IDR5,400 based on DuPont analysis, with a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 9.3%, beta 0.8x and a CAR-adjusted ROAE of 18.0%. We have also used 2025F book as reference. The implied multiples at our TP would be 2.5x 2025F book and 13.1x 2025F earnings (compared to current multiples of 1.8x and 9.8x respectively). Risks are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition, which could increase funding costs, worsening credit quality which would raise credit costs, and higher opex. Changes in management may affect the bank’s write-off policies and thus, credit costs. This would ultimately affect near term earnings for the bank.

BBNI — We derive our TP of IDR6,600 based on a DuPont analysis, assuming a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 8.5%, beta 1.0x and a CAR adjusted ROAE of 16.5%. We also use 2025F book as reference. The implied multiples at our TP are 1.4x 2025F book and 10.7x 2025F earnings (compared to current multiples of 1.2x and 9.3x, respectively). Key risks to our view are worsening macroeconomic trends, unfavorable regulatory changes, and tighter liquidity competition (which would increase funding cost), and worsening credit quality (which would raise credit costs), and higher opex.

BRIS — We derive our TP of IDR3,800 using DuPont methodology, with key parameters as follows: a risk-free rate of 6.5%, an equity risk premium of 7.8%, beta of 1.2x and a CAR-adjusted ROAE of 18.1%. We have also used 2025F book value in deriving our TP. Our TP implies a FY25F P/B of 3.3x and a FY25F P/E of 22.0x (compared to current multiples of 2.7x and 17.8x respectively). Risks are worsening macroeconomic trends, unfavorable regulatory changes, tighter liquidity competition that could increase funding costs, worsening credit quality that could raise credit costs, material management changes, and/or persistently high opex

Fig. 1: SRBI Issuance IDRbn

Fig. 2: SRBI yield %

Fig. 3: Blended SRBI yield %

Fig. 4: Gross SRBI maturities (IDRbn)

Fig. 5: Net liquidity (IDRbn)

Fig. 6: SRBI ownership (IDRtn)

Fig. 7: System LDR comparison (3Q24) %

Fig. 8: Bank-only LDR %

Fig. 9: Bank-only loan growth outlook %

Fig. 10: Stable bank-only NIM outlook %

Fig. 11: 12MMA WO trends – 2021-Nov24

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Erwin Wijaya (erwin.wijaya@verdhana.id)