Bank Indonesia has made a surprise 25bp benchmark rate cut to 5.75%. The decision to lower the benchmark rate reflects the central bank’s soft(low) inflation expectations of 2.5±1% in 2025 and 2026. The cut drove up the share price of major banking stocks on 15 Jan 2025, as the market expected the BI rate cut to lower banks’ funding costs.

However, in our opinion, the impact on banks’ funding costs will be limited unless BI lowers the reserve ratio, which currently stands at 9.0% (with incentive, we estimate the average reserve at ~6-7% of deposits). This is because in our opinion, broad liquidity in the banking system remains tight particularly if we take into account the liquidity concentration at major banks. As shown in Fig. 2 , as of 3Q24, system LDR stood at ~88%, but banks categorised under KBMI 3 (mid-sized banks) had an average LDR at ~91%. We also think that the rate cut would not spur loan growth. All major banks have guided for slower loan growth in 2025E than in 2024E. We think system loan growth could hover between 8% and 10% in 2025F, slightly below BI’s guidance of 10-12%.

Following the rate cut decision, one of our concerns relates to currency risks. As of Dec-24, total SRBIs held by non-resident stood at ~IDR224tr (~USD14bn), and these will mature in the next 12 months (refer to Fig. 1 for details).

Nonetheless, we maintain our view that the earnings profile of major banks under our coverage will improve in 2025F, except BBNI and BBRI as we expect them to have slower profit growth than BBCA, BMRI, and BRIS. Specifically, as major banks have guided for slower loan growth in 2025E, we believe tight liquidity in the system should NOT worsen. In turn, we think we could see stable 2025F NIMs for these banks. Thus, unlike in 2024 when banks may have compensated lower NIMs with higher loan growth to maintain their earnings momentum, we think loan growth in 2025F will slow down, but earnings growth should maintain at 2024 levels. This suggests less balance sheet risks for these banks in 2025F than in 2024.

In our recent note, we closely monitored trends in monthly loan write-off rates for major banks, which we deem to be one of the leading indicators for banks’ asset quality. High write-off rates could lead to elevated credit costs and vice versa. Based on our assessments 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 improvement in WO trends. These banks also have better funding costs, which in our view suggest their better abilities to pick borrowers with good asset qualities.

Based on the above, we maintain BBCA as our top pick in the Indonesia banking sector. The bank should provide the most fundamental protections. If BI’s rate cut decision leads to an eventual funding cost reduction, BBCA should also be one of the major beneficiaries, we believe.

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 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% (cut from 10.0%), 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. 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 CARadjusted 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. 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 Ownership (IDRtn)

Fig. 2: System LDR comparison (3Q24) %

Fig. 3: Bank-only LDR %

Fig. 4: Bank-only loan growth outlook %

Fig. 5: Stable Bank-only NIM outlook %

Fig. 6: 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)