Despite the anticipated rate cut cycle, we believe Indonesia banks have limited room to lower their cost of funds due to: 1) BI’s liquidity injections; 2) limited scope for a rate cut; 3) low sensitivity of banks’ cost of funds to BI rates; and 4) less room for banks to lower cost of credit. Consequently, we believe next year’s earnings growth is likely to be muted. Hence, this presents an asymmetric downside risk compared with market expectations.

BI’s liquidity injection

Contrary to market expectations, BI has injected liquidity since the SRBI issuance. Although SRBI drained IDR928tn of liquidity by September 2024, this has been offset by reduced reverse repo operations and more importantly BI’s government bond purchases. On a net basis, we think BI has injected roughly IDR205tn (USD13bn) over the past year (refer to Fig. 2).

Limited scope for a rate cut

Given that BI has hiked rates by only +275bp vs. Fed’s +525bp hike from the COVID-lows, we do not expect the extent of BI’s rate cuts in the present easing cycle to be in line with the Fed. In fact, the BI rate is already at pre-COVID levels (600bp), while the Fed funds rate remains 250bp above its pre-pandemic levels. Our analysis also suggests that banks’ cost of funds is less sensitive to BI’s rate movement (refer to Fig. 7).

Banks’ cost of funds normalizing to pre-COVID levels

We view the recent increase in banks’ cost of funds as a return to pre-COVID levels, rather than a sign of liquidity shortage. During COVID, companies hoarded cash, which resulted in a decline in banks’ funding costs. As the economy reopened and companies deployed cash, funding costs will gradually return to their pre-pandemic levels. Hence, the increase in cost of funds is more of a normalization rather than solely due to BI’s Monetary Operation in our view.

Asymmetric trade: a shift from banks to FMCG & retailers

With limited room for banks to lower funding costs, and on the back of already strong loan growth this year, we see limited scope for material earnings drivers going into the next year for Indonesia banks. Our top pick in the banking space remains BBCA (Buy). FMCG and retailers, however, provide asymmetric upside potential, in our view.

Given the weak purchasing power in the country, we do not rule out the possibility of a government stimulus for the mid- low-income segment. Yet, even without a stimulus, we believe our top picks within the sector can deliver 15-20% growth in 2025F under the current environment. In the FMCG space, we favour ICBP, MYOR, INDF, and KLBF – all Buy-rated (cumulatively 3% of JCI’s weighting), with small-cap picks of CLEO, ULTJ, and CMRY – all Buy-rated (cumulatively 0.5% of JCI’s weighting). In the retail space, we prefer AMRT, MAPA, and MIDI – all Buy-rated (cumulatively 2.5% of JCI’s weighting).

Fig. 1: Stocks for action

Fig. 2: BI’s liquidity injection of IDR241tn over the past one year

1. SRBI issuances drained IDR928tn liquidity.

2. Reduced Reverse Repo flushes IDR457tn liquidity into the system.

3. Other OMO added IDR79tn.

4. BI purchases IDR596tn of government bonds.

Overall, this resulted in net injection of IDR205tn over the past 1 year.

Fig. 3: Tight spread between BI and Fed policy rates; 2018 – 2019 average at 340bps

Fig. 4: Similarly, ID10Y and US10Y spreads are also close to record lows

Fig. 5: Real BI and FFR spread remains positive, but close to record lows. Pre-Covid average real spread was at 240bps. Better macros warrant lower spread

Fig. 6: Real ID10Y and US10Y spreads are on the trend average. The drop in 2013 – 2015 real spreads was due to Indonesia’s spike in inflation (fuel hike)

Fig. 7: Banks’ cost of funds is less sensitive to BI rate movement. Figures below are from previous rate cut cycle (ex-pandemic year)

Fig. 8: Banks’ cost of fund movement in previous rate cut cycle...

Fig. 9: …concurrent with LDR normalization

Fig. 10: …concurrent with LDR normalization

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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Jupriadi Tan (jupriadi.tan@verdhana.id) and

Erwin Wijaya (erwin.wijaya@verdhana.id)