Banks

Better liquidity to support NIM amid the potential continuous tight competition in lending

• BI has decided to cut its benchmark rate by 25bps favoring the banks that have seen the most increase in CoF, i.e., BBRI and BBNI.
• In our view, competition on high quality loans might persist in FY25F, favoring banks with higher fixed-rate loan, i.e., BBRI, BRIS, and BBCA. 
• We maintain Overweight ratings on the banking sector with BBCA as our top pick, while BBRI and BBNI could be the ST beneficiary of rate cuts.

Better liquidity supported by surprise BI rate cut

After spurring liquidity with GWM incentives and fewer SRBI issuances amid high SBN purchases, BI decided to cut its benchmark rate by 25bps on 18th Sep24, which is in line with BRIDS' expectations but a surprise to the consensus. We expect the liquidity improvement post-BI rate cut to ease banks’ CoF pressure, though we see this materializing only in 1Q25 at the earliest. This will positively impact banks’ NIM in FY25F.

Reversing NIM trend, expecting lower CoF

Among the banks under our coverage, BBNI has been the most impacted by the BI rate hike, with its NIM declining by 80bps yoy as of 7M24 (vs. -44bps for the aggregate of 10 banks). Consequently, we believe BBNI stands to benefit the most as BI shifts towards lowering interest rates, while BBCA will be the least benefitted due to its resilient NIM. However, we see some risks in this argument as BBNI has the least fixed-rate loan portion and easing CoF pressure might only be meaningfully impacted in 1Q25.

Expect stronger impact on CoF but lower loan yield might persist

Based on our analysis, all the banks except for BBCA experienced a higher transmission of rate hike to their respective CoF in the previous rate hike compared to their respective historical average. We believe this is partly influenced by the issuance of SRBI which accelerates liquidity absorption, hence we expect pressure on CoF will ease faster with less SRBI issuance. On the other hand, loan yield transmission was lower in the latest rate hike which we believe was owed to the more prudent approach in loan disbursement, i.e., pursuing higher quality customers which typically have lower yield. As this might be the case in FY25F, in our view, we see a risk that lower loan yields will continue, thus favoring banks with higher portion of fixed-rate loans.

Maintain Overweight, with BBCA remaining as our top pick

We roll forward our valuation on the banks and adjust our TPs (refer to company pages). On the back of better liquidity, higher NIM, and still robust asset quality, we maintain our Overweight rating on the banking sector. While BBRI (Not Rated) and BBNI (Buy, new TP Rp8,200) ought to benefit from lower CoF in FY25F, we still favor BBCA (Buy, new TP RP12,400) given its superior deposit franchise and robust asset quality for LT benefits and underweight position in local funds. Risks to our view are faster transmission of rate cut to CoF and easing pressure on high quality loan competition.

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