Indonesia Banks - Limited easing liquidity

Limited easing liquidity

Despite recent Bank Indonesia’s (BI) benchmark rate cut, funding costs may continue to inch higher – reflecting the generally tight liquidity in the banking system. Tight liquidity may likely persist in the medium term (2024-25) unless there are large inflows into the banking system. This could potentially translate into some upward loan repricing despite competition, partly because we think mid-to-smaller sized banks may find it increasingly difficult to compete as seen in recent bank-only results (i.e. slower loan growth than major banks). This could mitigate NIM risks for banks. And within the sector, we think major banks such as BBCA/BMRI/BBRI/BRIS are able to mitigate such risks better than others. Our top pick in the sector is BBCA; meanwhile in the syariah banking space, BRIS remains our top pick (despite its already premium valuation multiples relative to other major banks).

In this note, we assess BI’s Open-Market-Operation (OMO) trends. In short, total OMO outstanding as of 17 Oct 2024 reached ~IDR1,000tr – returned to prior peak (in Jan-2022). However, as % of loans, it was at ~13% in Oct 2024, down from ~16% in Jan 2022. We also see changes in OMO composition towards more SRBIs (BI’s Rupiah Securities with tenor ranging from 6-12 months). Latest OMO data shows SRBI’s outstanding reaching IDR932tr, with about two-thirds held by banks. At present, we have also seen a substantial drop in banks’ reverse repo (i.e. banks’ injecting liquidity into BI) as banks have shifted from reverse repo towards SRBIs (simply because of better yields).

And with weekly SRBI issuances approximating ~IDR17.5tr, we estimate net liquidity injections were ~IDR13tr in 4Q24 (relatively insignificant to the overall liquidity). Further out, this could lead to net liquidity reduction of IDR54tr in 1Q25 before improving to net liquidity addition of IDR38tr in 2Q25 (also insignificant to the overall liquidity). The concerns of potential net liquidity absorption in 1Q25 could deepen during the seasonally tight liquidity period as Indonesia will enter a peak holiday season at the end of Mar25.

Nevertheless, despite potentially still tight liquidity into 2025F, major banks could continue to garner superior loan growth at the expense of mid-to-small banks; thereby, further widening the gap between major banks and mid-to-small banks.

In this note, we also showLDRs and incremental LDRs (which is defined as the ratio of loan growth to deposit growth). Both point to higher ratios, which indicate tight liquidity in the system.

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 IDR8,450 using DuPont methodology. Key parameters are a risk-free rate of 6.5%, an equity risk premium of 7.8%, a CAR-adjusted ROAE of 19.8% and beta of 1.03x. We have also used 2025F book as reference. Our TP implies a 2.5x FY25F P/B and a 12.4x 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 IDR6,300 using DuPont methodology, assuming a risk-free rate of 6.5%, an equity risk premium of 7.8%, growth of 10.0%, beta 0.8x and a CAR-adjusted ROAE of 18.0%. We also use 2025F book as reference. The implied multiples at our TP are 2.9x 2025F book and 14.8x 2025F earnings (compared to current multiples of 2.0x and 10.7x, 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.

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.